Transferring Ownership of an LLC: Everything to Know
Transferring ownership of an LLC can either be fairly simple or moderately complex, depending on how your LLC is organized.4 min read
Transferring ownership of an LLC can either be fairly simple or moderately complex, depending on how your LLC is organized. There are a number of reasons LLC ownership changes. Some reasons include:
- A member decides to depart.
- Existing members wish to bring on a new person.
- Someone dies, goes through a divorce, or becomes disabled.
- You make the decision to sell the entire business.
Because LLCs are governed by individual states, the process of how an LLC operates may vary slightly. LLCs follow similar regulations to partnerships, but have the bonus of limited liability protection, like a corporation. Owners are called members and they are responsible for determining how the business operates and what the process is for transferring ownership interests.
How to Transfer Ownership
Start by learning what your particular state regulations are regarding ownership transfers. Some states require a unanimous vote, or you may have an operating agreement in place that modifies the existing regulations.
Next, provide a valuation method that all members are willing to agree on. Without a stated valuation, members can run into issues trying to sell. Even if your operating agreement contains buy/sell language, it must include instructions on valuation as well.
Your LLC operating agreement can be simple or difficult regarding bringing on potential owners and selling shares. This means original members need to make a decision on how easy they want it to be when bringing on new members and how difficult they want the process to be if someone decides to leave. Deciding on these issues ahead of time can save problems with decisions being based on current emotions only.
Also, factor in any possible restrictions regarding the transfer. Most state regulations allow for individual LLCs to dictate specific rules on transfers. For example, your operating agreement may dictate that ownership interests can only be sold to current members.
Process for Transferring Partial Interest
Because LLC owners are called members, each one owns a percentage of the business. To add new members or change the percentage, you'll need to transfer ownership interests. Your operating agreement is the main guide for how to complete ownership transfers. As a reminder, the operating agreement should have been drafted when you initially set up your LLC. It is a contract between the company's members that dictates how you will govern ownership. Otherwise, your business may have a separate buy-sell agreement in place. To utilize buy-sell provisions, they should specify a method for evaluating a business's worth. They can also place restrictions on new members, how membership interests are purchased back, or what is required for approving a sale or transfer.
If your operating agreement doesn't have buy-sell agreements in place, check with your local state regulations for suggestions on how to handle these topics. Be careful as some states require an LLC to be dissolved if your operating agreement doesn't provide for ownership transfers. This is where consulting with a lawyer is important, as this can have long-term consequences. This is the ideal time to really review your existing operating agreement as well. Prepare and sign a new one that is up-to-date and reflects current practices.
Buyout agreements should contain several common components. Involved parties should be named, and it should have their contact information, the amount of ownership, and its value. It must clearly state whether the member is being bought out or is relinquishing their ownership right themselves.
Once complete, the Certificate of Organization needs to be updated. Retrieve any membership certificates from the person releasing ownership and issue new certificates with the updated information to the new owner if applicable. If there isn't a new member and the LLC is keeping the remaining shares, they should split them between members or have the LLC retain them so they can be issued at a later date.
Selling an LLC
Surprisingly, buy-sell agreements do not include information on the process to sell your entire business to someone else. It only regulates how members transfer interests between themselves and new members. To sell a business, you need a buyer and an agreed price. Using a business valuation expert can be crucial here along with an attorney who can advise on tax implications.
Single-Member LLC Transfers
To complete a single-member transfer:
- Assign your interest to the buyer
- Amend your Operating Agreement to remove yourself as a member and add the buyer as a new member
- Verify your state's requirements for updating members on record
- Complete a buy-sell agreement that details the transaction
- Get a new EIN for the new owner
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