One of the advantages of having a limited liability company (LLC) is that even when sold, the business may continue on as before with a simple transfer of ownership.
How to transfer ownership of an LLC is a topic that is generally covered extensively in the LLC's operating agreement. When forming an LLC, you likely signed an agreement that described how the business would function. Although this document is not required by law, most LLCs have them, and within them, you will find the exact process to follow when transferring ownership of your LLC.
Note that the process varies depending on whether the entire business is being sold or whether only the owner's names and percentage ownerships are changing.
What is a buy-sell agreement?
A buy-sell agreement is an agreement documented in the operating agreement that outlines instructions for buying out a member of the LLC. Some specific issues covered include who may become an LLC member, whether the business must buy back shares from a departing member, the distribution of the remaining shares, and the process for approval of the transfer.
The agreement should also address how the business and membership interests in it will be valued in the case of interest transfer. This valuation method must be followed or the LLC could face a lawsuit by the departing member and stiff penalties for violating its own operating agreement.
Buying out an LLC member
While specific provisions vary, if the LLC is buying out a member's share, ownership transfer entails valuing the business and member shares to determine how much the departing member's share is worth. Usually, this departing member's share is then bought out by the LLC, and often, the transfer also must be approved by other LLC members.
If your operating agreement doesn't specify the change of ownership process, you must turn to your state's law for guidance. Some states require the complete dissolution of an LLC if an operating agreement doesn't provide for an ownership transfer process. Because this process can be detrimental to your business, you should consider this factor when forming the LLC to better lay a path for down the road even if you don't anticipate interest transfers.
Selling an LLC
Unlike the valuation of the business for buying out an LLC member, your operating agreement does not require a specific business valuation method or process for selling an LLC. In that sense, you are on your own to find a buyer and agree on a price. Your buyer may want to purchase the entire business or only its assets.
Once you have reached the terms of the sale, you can memorialize the terms in a preliminary memorandum or change of ownership letter. When both parties are satisfied, you can move forward with a formal transfer of business ownership agreement, which is executed just like any other type of contract according to your state's laws.
Because LLC transfers of ownership can have far-reaching and long-lasting consequences to a business, the best practice is to document the process as clearly as possible within the operating agreement at the formation of the LLC. Making sure you have LLC ownership transfer provisions in place from the beginning can save you major headaches later, which makes sound LLC legal advice a smart idea from the get-go.
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