How to Transfer Ownership of an LLC Properly? (The Easy Way)
It may appear to be a difficult process to sell an LLC, but it doesn't have to be.
You'll almost certainly want to locate someone who wants your company's assets and is prepared to pay the price for them if you don't want to sell your firm for a few pennies on the dollar (that would be foolish).
With over a decade of experience in LLC laws and management, I'm here to guide you through the correct process of transferring your LLC ownership seamlessly and confidently.
In my research, I also consulted with professional lawyers and accountants to bring you an intricate account of what needs to be done during the transfer process.
Let's dive into the specifics and ensure your LLC transfer is executed flawlessly.
- To properly transfer ownership of an LLC, amend the operating agreement and articles of organization, obtain existing members' consent, and file necessary documents with the state.
- Ensure all financial and tax obligations are settled and update all licenses and permits to reflect the new ownership structure.
- According to the American Bar Association, understanding the tax implications, such as capital gains and income tax, is crucial when transferring LLC ownership.
- I advise anyone going through this process to consult with a professional lawyer and accountant to avoid potential pitfalls.
How to Transfer Ownership of an LLC?
To transfer ownership of an LLC, create a buy-sell agreement, amend the operating agreement and articles of organization, obtain consent from existing members, and file the necessary documents with the state.
During this process, ensure all financial and tax obligations are settled and update all licenses and permits to reflect the new ownership structure.
After a sale, you must file Articles of Merger or Assumption of Liability to transfer your company's control.
The state law that applies to your business is determined by the state in which you founded your LLC.
However, there are two categories of ownership transfer in LLCs:
1. Partial Interest Transfer Ownership
When you sell a part of your LLC, you transfer partial ownership. For instance, if you own a 50 percent share in an LLC, anyone who buys 25 percent is taking up a part interest.
The person buying the partial interest will become the new owner of the percentage they bought.
Members' interest is worth the ownership percentage of the company's net worth. To illustrate, your business is valued at $1,000,000, a member owns 25% of the business. The ownership percentage of the member is $250,000.
2. Complete Transfer Ownership
When you sell all of your company, you transfer complete ownership. For example, if you own a 50 percent share in the LLC, whoever buys all of it is taking up 100 percent ownership.
One of the best methods for selling your LLC is to list it with an investment firm that offers brokerage services.
You can then put some advertisements that you intend to sell (with pictures if you like) on websites like Craigslist and eBay Classifieds.
To determine the basic value of your LLC, compute for the average monthly income for the last 24 to 36 months.
The biggest risk is not taking any risk. In a world that’s changing quickly, the only strategy that is guaranteed to fail is not taking risks." - Mark Zuckerberg, CEO of Facebook
Here are the steps you will follow during the transfer:
1. Revisit Your LLC's Operating Agreement
Your operating agreement or articles of organization may have requirements on how to change your business structure.
For example, it could require the vote of all members. If you need to increase membership interests, consider reading how to do this.
2. Understand What Your Buyer Wants
You should determine what the buyer wants from you. Some buyers may want a majority share in your business or think of going public. If you are not comfortable with their intentions, do not sell to them.
3. Create a Buy-Sell Agreement
The buy-sell agreement should be your first step in the actual sale process, as it will help you determine how much the membership interest is worth and who gets what after purchase.
If you already have a buy-sell agreement and it doesn't mention selling LLC interests, review it carefully and consult with your lawyer about any changes that need to be made.
To protect both parties involved:
- Provide the LLC's records and documents with evidence of the sale (written agreements and amendments to articles of organization).
- Inform all members and managers of the changes that have been made.
- Submit the sale agreement to your state business registration division.
- DO NOT transfer LLC interests unless you have completed a buy-sell agreement that includes how, when, and who can sell their membership interest.
- If you are considering selling an interest in your LLC (including transferring your membership interest), make sure to review and amend any relevant documents, such as organization and operating agreement articles.
- Give adequate notice to all LLC members and managers (the company must give 30 days' written notice before the next management meeting).
- Submit a copy of the sale agreement to your state business registration division.
4. Notify and Document The Transfer With The State Registration Agency
If you are changing the ownership in your Limited Liability Company, you must document this change with the state.
Submit "Notice of Change in Ownership" to your state business registration division that includes:
- Name of the LLC.
- The date on which they will take effect.
- Names and addresses of all new owners (buyers).
- New LLC name (if applicable).
The percentage of ownership interest acquired by each new owner is listed for corporations.
If you open an LLC in California, the state will also require you to submit an "Application for Change in Ownership" form.
You can find this form on the California Secretary of State website under Corporations Forms, or you can consult your lawyer.
5. Notifying Others of the Transfer
Besides the state and the LLC members, it is important to notify the IRS and your banks of the transfer.
This notification will affect the person responsible for paying taxes, so it is important to send them a change of ownership letter at least 15 days before January 1st.
With the IRS, the new owner may need to obtain a new EIN or EFIN. You can use an EIN or EFIN application to replace a lost EIN, change the LLC's name, add owners, and more.
The IRS must also be aware of the new Responsible Party for the LLC if that person has changed.
When transferring ownership of an LLC, it's crucial to understand the potential tax implications that may arise .
These can vary based on the structure of the LLC (single-member vs. multi-member), the method of transfer, and the state in which the LLC operates.
Common tax considerations you will encounter include:
- Capital Gains Tax: If the ownership interest is sold for a profit, the seller may be subject to capital gains tax on the difference between the selling price and the original purchase price.
- Gift Tax: If the ownership interest is transferred as a gift, the giver may be subject to gift tax, depending on the value of the interest transferred.
- Income Tax: New owners may inherit the tax responsibilities associated with the LLC, including income tax liabilities or credits.
- Basis Adjustment: The new owner's basis in the LLC may differ from the previous owner's, affecting depreciation deductions and future tax liabilities.
- State Taxes: Some states impose additional taxes on the transfer of business ownership, such as transfer taxes or stamp duties.
What Are Some Reasons for Transferring Ownership of an LLC?
Some reasons for transferring ownership of an LLC includes the following:
- A change in personal or financial circumstances (e.g., divorce, death, retirement).
- A desire to sell your interest in the LLC.
- A desire to increase or decrease the number of owners.
What Are Some Common Restrictions on Selling Interests in an LLC?
Many operating agreements prohibit you from transferring your membership interest without the consent of other members.
If the operating agreement allows the transfer, it will likely require the selling member to give all other members notice of the sale.
Do I Need Written Agreements for Every Transfer of Ownership?
Operating agreements should have a "buy/sell" clause that outlines the procedures for transferring ownership.
This clause will require all LLC members to sign off on changes in ownership, or you can take other steps to prevent an unwanted transfer.
LLC's operating agreement may also include other terms, such as the sale price of membership interest sales.