A limited liability company (LLC) is a business structure that is well-known for the flexibility it provides business owners. It combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. Each owner in an LLC is a member. Each member in the LLC owns a percentage of the company also known as a membership interest. Below we discuss transferring ownership interest in an LLC in a variety of scenarios.
Reasons for a Change in Ownership
An LLC may change ownership for several reasons. A few of these include:
- Buyout of departing member
- Bringing in a new member
- Selling the entire business
Steps to Transferring Ownership in an LLC
- Review LLC Operating Agreement and/or Articles of Organization
- Obtain a business valuation
- Finalize the proper selling documents
- Amend the LLC Operating Agreement and/or Articles of Organization if needed
Review Governing Documents
Transferring ownership in an LLC is a relatively straightforward process. LLC’s are also far more flexible because of their governing agreements. Two documents dictate how this transfer will take place. The Articles of Organization and the LLC operating agreement. These documents outline all aspects of ownership. The operating agreement is a contract between LLC members that specifies the way the LLC operates. It may dictate partnership dispute resolutions, member withdrawing process, voting, and interest transfers. It might also specify how member buyouts work, who can become a member, and how ownership transfers can be approved. Your LLC may also have a separate buy/sell agreement that governs buyout or buy-sell provisions as part of the operating agreement.
Within the operating agreement, buy-sell provisions specify how to value the business and its membership interests. The agreement may restrict who becomes a member, the buyback of shares from departing members, and how to approve transfers.
If the LLC does not include a buy/sell agreement, it is best to check with your state on how to transfer membership interests. It is always best to plan for LLC ownership transfers by including a buy/sell provision in your operating agreement. Doing so will help transfers go more smoothly and avoid disruptions in your business. For more information seek legal advice from a trusted individual.
Once the transfer is approved, the LLC drafts or updates company documents that refer to ownership. A revision of the operating agreement will include details of each member’s investment and percentage ownership. You may also need to file a Certificate of Amendment with the state to update the names of the members. New membership certificates can then be issued to the remaining members.
Selling an LLC
Selling an LLC to a third party is another process entirely. The buy/sell provisions often don’t offer guidance on this. It typically only governs the way members transfer membership interests among themselves and a new member.
To sell an LLC, you will need to find a buyer and determine a purchase price. When determining the purchase price, it is best to involve a valuation expert who can determine how much the LLC is worth. The valuation expert will analyze the financials and compare the business to similar companies who have sold recently. They will then determine a range of values your company is worth.
All members of the LLC will need to consent to sell the business. Once a buyer is selected and the purchase price is determined, all parties will sign the business sale agreement. The business will then transfer along with all ownership interests.
When selling an LLC, it is also wise to consult with your legal representative. They can consult you on the financial, legal, and tax implications of selling your business and transferring ownership.
In a multi-member LLC, if the LLC is adding a member or withdrawing a member, the LLC Operating agreement will govern exactly how the transfer happens. All membership interests in the LLC will add up to 100%. Usually, the document has a provision that if any member wants to transfer their interest, they must first offer it to the other members. This is called a “right of first refusal.”
A business valuation is then ordered to value the member interest being transferred. After which the membership interest is either bought out by the existing members or a new member buys out the member leaving. If the existing members buy the member out, the membership interests are redistributed. The governing documents are then amended to reflect the new percentage ownership. If a new member is added, the new member signs the membership purchase agreement and becomes a new member replacing the departing member.
Single Member LLC
Selling ownership interest in a single-member LLC is similar to that of a sole proprietorship. Although it is a more formal business structure, the LLC has only the assets and liabilities to deal with. Whether you are buying or selling a single-member LLC it is best to get a professional valuation. Doing so will help in determining a fair market value for the LLC. The buyer and seller will sign a business sale agreement along with an LLC membership interest assignment. These documents show evidence of the sale and the change in ownership. Once the sale is final, documents filed with the state like the Articles of Organization may need to be changed.
Peak Business Valuation, a leading appraiser in Utah, is here to help with ownership transfers. We love providing business valuations for small business owners who are looking to buy, sell, or grow a company. Questions are always welcome! Please reach out via email or by scheduling your free consultation below.
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