How to Change Ownership of an LLC
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There may come a time when you want to change the ownership of your LLC. Maybe you are selling your business, or maybe you are looking to buy a business from someone else. Either way, you need to change who the government sees as the owner of the LLC before you proceed.
Transferring an LLC from one owner to another is a straightforward process, but it does take a few steps to complete. Read on to learn all about the process of changing the ownership of an LLC.
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How to Transfer the Ownership of an LLC
There are many reasons you may want to transfer the ownership of an LLC. The main ones include adding new members, old members leaving, or the death of a member. Sometimes these occur as a result of a life event like a marriage or a divorce. You may also be looking to sell an LLC because you wish to move on to another project in your life.
For those who are simply removing or adding a member, this is a transfer of partial interest. If you are selling or buying an entire LLC, then this is a full transfer.
Transfer of Partial Interest
In order to transfer partial interest of an LLC, you need to have an operating agreement for your business. This operating agreement will outline who owns what portion of your business and in what capacity.
If your business doesn’t have an operating agreement at the time of the transfer of partial interest, then the law of the state you live in will be the default. Be cautious when using these default laws, however, because they may state that two owners of an LLC split that LLC 50/50 when you and the other owner may have decided something different. Because of this, it is always best to have an operating agreement before attempting a partial transfer of an LLC.
It is also possible that you live in a state where it is not possible to transfer the partial ownership of an LLC at the leaving or death of a member. In this case, the LLC will need to be dissolved as the ownership cannot be partially transferred.
Once it has been clarified whether or not you are able to transfer your shares to another member without dissolving the LLC, the next step is to ensure the transfer is approved by all LLC members. This can be a long process, depending on the size of the LLC.
It is recommended that you hire an attorney to help you through the process. They can walk you through redistributing the shares of a member that has left the LLC, as well as drafting all the paperwork required by the state for the transfer.
While this may sound complicated, as long as your LLC has an operating agreement in place from the beginning, a transfer of partial ownership of an LLC is actually fairly straightforward. If you don’t have an operating agreement is when it starts to get complicated.
Selling or Buying an LLC
If you are selling your LLC, you will want to start by getting a valuation of what your business is worth. You may also want to offer the buyer the option to look over the business's records themselves.
Next, you will want to hire an attorney. The attorney will ensure that all laws are followed and that the proper sale agreement is drafted. He or she will also draft a memorandum of understanding and the contract for the sale.
After the attorney has done their part and the sale is final, the previous owner of the LLC will relinquish all stock certificates, and new ones will be issued to the new owner or owners of the LLC.
Step-by-Step Process of Changing the Ownership of an LLC
We understand that the legal side of changing the ownership of an LLC is complicated, which is why although we want to give you the most in-depth information possible, we have included the simple set of steps below.
Follow these steps to change the ownership of your LLC.
Step 1: Review Any Operating Agreements
This agreement will outline how the transfer will go. If you don’t have one, then you need to look at the laws in your state. Note that without an operating agreement, depending on the laws of your state, your LLC may have to be dissolved in this step.
Step 2: Create a Buy/Sell Agreement
Even if you are transferring partial ownership, you will need a buy/sell agreement stating what share of the company is bought or sold by the new or leaving member.
Step 3: Negotiate
If you are selling the LLC in its entirety (or buying) take the time to send the contract back and forth a few times, negotiating the sale price, terms, etc.
Step 4: Record the Change
Once the buy/sell agreement is finalized and signed by all parties, it’s time to update the changes in the files of the organization. This will include providing the state with the information on the updated ownership of the LLC.
Step 5: Exchange Stock
Exchange any stock certificates required by the buy/sell agreement.
Step 6: Tell All Authorities
The state isn’t the only one who needs to know you have transferred the ownership of an LLC. You also need to tell the IRS, your company’s bank, and any vendors you work with.
And just like that, you have transferred the ownership of your LLC.
How Many Owners Can an LLC Have?
If you are adding a new owner to your LLC, you may be wondering just how many owners your LLC is allowed to have.
Technically, there is no limit, but the number of owners might change your tax designation. This is the case in the instance of an S-Corp tax designation, which has a limit of 100 owners.
Otherwise, you can feel free to add as many owners to your LLC as you wish, just ensure you check the tax implications with a lawyer if you plan to exceed 100 owners of your LLC.
Also, keep in mind that the more owners you add to your LLC, the more important it is for you to have the proper documentation, such as an operating agreement, in place when you start your LLC.
Preparing an Operating Agreement for Your LLC
As you can see, it is critical to have an operating agreement for your LLC from the beginning, especially if your LLC has multiple owners or you suspect it will in the future.
When you form your LLC, you should take the time to include all of the following in your operating agreement:
- How shares are divided
- What happens at the death of a member
- What happens if a member goes bankrupt
- What happens when a member becomes disabled
- What happens at the retirement of a member
- How a sale of the LLC will be processed by the LLC
- How future members of the LLC may be added
Some LLCs dictate that their members must purchase life insurance policies for all the other members of the LLC. These life insurance policies are then cashed out at the death of a member in order to buy out their portion of the LLC for the other members.
Other LLCs may decide to put aside part of the profits each year instead and use this money to buy out that member in the case of an adverse event.
The point is, it doesn’t matter how you prepare for these events, just that you do. Unfortunately, no matter how well you may plan your life and your LLC, people get divorced, go bankrupt, and die. Taking the time to discuss what will happen in these situations in advance is important because it can prevent you from a lengthy legal battle later or even the inadvertent dissolution of the company under state laws.
You may also want to consider creating a buy/sell agreement in advance if your ultimate goal is to sell the company for a profit in the future. This can save you time and money when that day comes, as the stipulations of the sale within the LLC will already be outlined.
Final Thoughts on Changing the Ownership of an LLC
Overall, the process of changing the ownership of an LLC is easy if you already have an operating agreement in place. This is why it is best to create an operating agreement when you first create your LLC, to avoid a messy situation later.
No matter how you plan to change the ownership of your LLC, it is always a good idea to hire a lawyer to walk you through the process and to draft up documents to ensure everything truly goes as you planned it.
Reference Legal Explanations
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"How to Change Ownership of an LLC". Legal Explanations. Accessed on November 24, 2022. https://legal-explanations.com/blog/how-to-change-ownership-of-an-llc/.
"How to Change Ownership of an LLC". Legal Explanations, https://legal-explanations.com/blog/how-to-change-ownership-of-an-llc/. Accessed 24 November, 2022
How to Change Ownership of an LLC. Legal Explanations. Retrieved from https://legal-explanations.com/blog/how-to-change-ownership-of-an-llc/.