The process of transferring ownership of an LLC, especially when it comes to adding new LLC members or selling off the whole firm, is governed by the terms contained in the LLC’s operating agreement.
This tutorial examines some of the reasons an LLC may need to transfer ownership and if it is the best option for your company.
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Reasons for Changing LLC Ownership
A limited liability company’s ownership structure may need to be changed for a number of reasons, including:
An existing member’s departure
A new member has been added.
Transfer of ownership to a family member
Existing members of the firm sell the company
How Do You Change the Ownership of an LLC?
There are two options for transferring ownership: selling the whole LLC or transferring a portion of the equity.
Transfer a Partially Owned LLC
When just a piece of ownership is sold, this is referred to as transferring partial interest. This might be due to the addition of a new member, the departure of an existing member, or the desire of a member to sell some of their present ownership percentages. The standard stages for this technique are as follows:
Examine the internal paperwork of your LLC. The buy-sell terms in your Articles of Organization and operating agreement should govern the transfer procedure. Consult your state’s business services section if you do not have these clauses in your paperwork.
Follow the processes outlined in the buy-sell agreement. This may entail developing a resolution for the sale, establishing a timeframe for the sale, and receiving consent from the other LLC members. Make care to record these events.
Keep your company up to speed with the latest state regulations. Once the ownership transfer is complete, you must amend your Articles of Organization with your preferred state of filing (including those that you operate as a foreign LLC in). This is usually accomplished by submitting Articles of Amendment or your state’s yearly report.
Inform the IRS. When the “responsible party” of an LLC changes (i.e., the individuals having control over the LLC’s finances and assets), Form 8822-B must be filed.
Notify any additional third-party institutions. Banks, lenders, net-30 suppliers, registered agents, and other financial institutions may be included.
Your operating agreement should be updated. Once your LLC has completed the appropriate ownership changes, be sure to update your operating agreement to reflect the new membership shares and interests.
It is important to note that if your operating agreement does not have a buy-sell clause, your state may order you to dissolve your LLC.
Transfer Complete Ownership of an LLC
You may also sell your LLC to a third party to transfer complete control. This is a more difficult procedure that should be carried out with the assistance of an attorney, although some of the stages are comparable to a partial transfer of ownership. The fundamental stages are as follows:
Examine your company’s documentation.
Examine the assets of your company. You must first appraise every property before discussing sales with possible purchasers (e.g., real estate, intellectual property, future revenue projections, etc.). While self-evaluation is possible, engaging a company valuation specialist may improve accuracy.
Make a sales contract with the buyer. This contract should indicate explicitly what is being acquired, the existing obligations, the timing for the transaction, and that the present LLC members consent to the sale.
Inform your state of the upcoming sale. You must register the sale with your state’s Secretary of State (or applicable business services division). If you do business in other states as a foreign LLC, you must also inform them.
Inform the IRS.
Notify any additional third-party institutions.
Transferring Family Limited Liability Companies
A family LLC is an LLC founded by family members for the purpose of inheritance planning. The corporate structure is similar to that of a conventional LLC, but family LLC owners are often senior members of a family who establish processes for passing assets to other members of the family (e.g., children, grandchildren, etc.)
When it comes to transferring ownership, family LLCs may employ the same ways as normal LLCs:
Buy-Sell Agreements: If the family LLC’s operating agreement includes buy-sell provisions, they may transfer ownership to other family members by selling them their ownership portion.
Living Trusts: LLC ownership may be converted into a living trust by putting the company into a trust and identifying the desired new owner as the trust’s successor.
LLC owners may transfer ownership to another family member. This strategy may necessitate the owner paying federal gift taxes on any amount in excess of the exemption limit.
Selling the LLC: Family LLC owners might sell their firm to totally transfer ownership to other family members. When accounting for company value, the transaction must be at a fair price, otherwise it may be deemed a gift.
Dissolution vs. Transfer
If the members of an LLC do not want to continue running their company, they may either transfer ownership of the LLC or dissolve the LLC.
As previously stated, transferring company ownership occurs when the members sell a portion or all of the entity. The LLC entity survives, but with new owners.
Dissolving an LLC ends the LLC’s existence and notifies the state, the IRS, and the LLC’s creditors that the company is no longer in operation. When an LLC dissolves voluntarily (i.e., by vote and agreement of the members), the owners must normally submit a Certificate of Dissolution with the state and obtain a tax clearing.
What to Do After You Have Transferred LLC Ownership
Depending on the circumstances of the ownership transfer, the following procedures might assist you prepare for your next business step:
Your operating agreement should be updated. If you’ve merely transferred partial LLC ownership, ensure sure your operating agreement is up to date. Take note of any new membership percentages, changes in tasks, and changes in member titles.
Notify others of your modifications (if applicable). If you’ve added or deleted an owner from your LLC, be sure to update your social media accounts, website, and any other platforms where your owners’ contact information is shown.
Begin a new business. Consider your next business step if your ownership transfer results in the total sale of your LLC. Find a fresh business concept and begin investigating how to set up an LLC for your new venture.