Many limited liability companies (LLCs) will change in ownership at some point during the life of the business.
Ownership changes happen for a variety of reasons, including:
- A member decides to leave the company
- The existing members want to bring in a new member
- A member dies, becomes disabled, or divorces
- You decide sell the entire business
The procedure to transfer LLC ownership depends on whether you’re transferring the whole business or only changing the names and percentage ownerships of the members, such as when you take on a new member or buy out a departing member.
Transferring a Partial Interest in the LLC
Your LLC’s owners are called members. Each member owns a percentage of the business, which is known as a membership interest. If you want to change the percentage of ownership or add new members, you will need to transfer some of your LLC’s membership interests.
The key document that will guide you in how to transfer ownership in an LLC is your LLC operating agreement.
You most likely signed an operating agreement when you set up your business. An operating agreement is a contract among the LLC’s members that specifies the way it will function. If it includes buy-sell or buyout provisions, those will govern the way you transfer ownership. Alternatively, your company may have a separate buy-sell agreement.
What Is a Buy-Sell Agreement?
A buy-sell agreement is a provision in the operating agreement that will typically specify a method for placing a value on the business and its membership interests. They also might place restrictions on who becomes a member, require the business to buy back shares from a departing member, or specify what needs to be done to approve a transfer.
If your operating agreement does not include a buy-sell agreement, you should check your state statutes for guidance on how to transfer membership interests. You may be able to negotiate a buy-sell agreement or a written agreement to transfer ownership. In some states, you may have to dissolve the company if your operating agreement does not provide for ownership transfers. Since these actions can have long-term consequences for your business, it’s wise to consult with a lawyer.
This is also a good time to review your operating agreement and make sure it is relevant and meets your needs now that your membership is changing. For example, an operating agreement for a single-member LLC may be missing some provisions that are needed for a multi-member LLC.
If your old operating agreement seems inadequate, you should prepare and sign a new one that reflects the new ownership structure. If you don’t need a new agreement, you can prepare an amendment that lists the new members.
You typically don’t need to file anything with the state to finalize the ownership transfer, but you’ll want to list the current members as part of any annual reports you make to the state.
Selling an LLC
Despite its name, a buy-sell agreement doesn’t offer guidance on how to sell your entire business to a third party. It only governs the way the members will transfer their membership interests among themselves and new members.
To sell an LLC, you need to find a buyer and agree on a price. This may involve using the services of a business valuation expert, having the buyer examine your business’s books and records, or a combination of the two. A buyer may want to purchase the entire company or may only want to purchase its assets.
Selling an LLC can have complex financial, legal and tax implications, so it’s best to consult a lawyer who has experience with buying and selling them. The terms of the sale may initially be memorialized in a term sheet or memorandum of understanding, followed by a more formal contract.
It’s always best to plan ahead for business ownership transfers by including buy-sell provisions in your operating agreement. Buy-sell provisions can help a transfer go smoothly and avoid disruptions to your business. If you don’t have a buy-sell agreement, or if you want to sell your entire business, you may need to seek legal advice.