How to Transfer Ownership of an LLC
There are a lot of limited liability companies that change the ownership at some point during the company’s life time. The most common kind of transfer is the transfer of ownership of an LLC. The changes in ownership usually takes due to many reasons and some of them are:
- You decide to sell the business.
- A member divorces, becomes disabled or dies.
- The existing members decide to get a new member in their team.
- A person chooses to exit from the business.
The main process to transfer ownership of an LLC is based entirely on if you are transferring the complete company or just changing the percentage and names of ownership of the members. This includes getting a new member or even buying out an old member.
Transferring a Partial Interest in the LLC
You might already know, but the owners in an LLC is called the members and each member have a percentage of the company that is also called the membership interest. In case you want to add more members or change the percentage of ownership of any any member, you would have to transfer parts of your membership interests of the LLC.
The main document that would help you always take the right steps and know exactly how you can transfer the ownership of an LLC is the LLC operating agreement that should be made at the beginning itself.
During the setup process of the LLC, you normally have to sign the operating agreement. It is a contract that if for all the members of the LLC which specifies the exact way in which the LLC would run.
In case the agreement includes the buyout or buy-sell provisions, they would be the ones would behave as the rules that would govern the way the transfer ownership of an LLC is done. Conversely, it is also possible where your LLC can have an entirely different buy-sell agreement and a different LLC operating agreement.
The buy-sell provisions would normally specify the way in which the business would have its valuation done and how the value of the membership interests are found. Other than this, there can also be restrictions regarding which person can be a member of the LLC, how the LLC would buy the shares back from a member who is departing, or also on what has to be done for the approval of the transfer of ownership of an LLC.
In case your LLC operating agreement does not have the buy-sell agreement in it, you would have to check with your state’s statutes for guidance on how you can easily transfer the ownership of an LLC. You would then be able to easily negotiate a written agreement or a buy-sell agreement to transfer ownership of an LLC.
In a few states, it is important to have the ways to transfer ownership of an LLC in the operating agreement. In case you do not have it, you might have to dissolve your company. These actions could have long-term consequences for your company. Hence, it is better to consult with a lawyer and ensure that all the agreements are prepared as per your state’s laws.
It is also a great time to review your operating agreement and ensure that all the points added in the beginning are relevant and actually meet with yours and your business needs since your membership is changing. For instance, you might have prepared the operating agreement for a single-member LLC and since the number of members are increasing now, you would have to add the missing provisions that are needed for a multi-member LLC.
On the other hand, in case your old operating agreement is inadequate, it is important that you prepare and even sign a new agreement that would reflect the new ownership structure. And if a new agreement is not needed, you could also create an amendment that would list the new members.
You normally do not have to file any document or otherwise with the state for finalizing the transfer of ownership of an LLC. But still, to be on the safe side, it is better to list the current members in the annual reports that you would make to the state later in the year.
Selling an LLC
Even though the name of a buy-sell agreement might say that it has the details and guidance to help you understand how to sell your complete company to a third party, it does not have any such things. It only dictates how the members will work out the transfer of ownership of an LLC among themselves and the new members.
If you are thinking about selling an LLC, you would need to search for a buyer at first and agree to a specific price for which you would be selling your company. And for finding the price, you would need to value your business. This would need a business valuation expert who would work towards getting your company’s value.
You would also have to share your company’s books and records, along with all the details for the assets that your company holds. With all this, you would have your company valuation done accurately. Moreover, you also have to be open towards selling the whole company or just a part of it, since the buyer can want any one of the two.
For instance, the buyer might just want the company’s assets and not the other parts of the company. This is also why you need have the valuation done in such a way where you have the value of various things separately. Moreover, selling an LLC does just include things where you easily transfer ownership of an LLC. It has a lot of complex, tax, legal, and financial implications. Hence, it is advised to take the help of lawyer for the process of the selling and buying of the LLCs.
With the help of the lawyer, you would be able to prepare the sale contract properly. The terms of the sale might be memorialized concerning the memorandum or sheet of understanding, followed by a more formal contract.
It is the best thing to always plan ahead of the process of transfer of ownership of an LLC which also includes the buy-sell provisions which has to be stated in the operating agreement so that you do not have to dissolve your business as per the state’s laws. These provisions would help you to have the transfer completed smoothly. You would be able to avoid any disruptions that might come between your business.
All-in-all, if you do not have a buy-sell agreement or you are looking to sell off your complete company, you need to take the help of a professional lawyer. This would help you avoid any complications and loss of company, money or even both.
How can IncParadise help you?
If you have your business plan ready and have not set up your business and need some help with it, IncParadise can assist you. Head over to Incparadise.net to check out the packages available along with the services that we provide. Have your company registered and incorporated. Along with that, remember to prepare the operation agreement that states all about the transfer ownership of an LLC.