Businesses are frequently bought and sold as they become more or less successful or as the operators’ interests change, but each type of business requires unique formalities when it changes hands. For example, corporations are acquired by buying shares while sole proprietorships can be purchased outright. If you want to purchase a single-member limited liability company, sometimes classified as a “disregarded” LLC, you must develop a purchase agreement and file certain forms with your state’s corporate registration office.
An LLC is a special type of business structure created by state statutes. Though each state can have its own rules for how LLCs are formed and operated, LLCs operate similarly in most states. IRS rules do not recognize LLCs as a type of business entity for tax purposes, so LLCs get to choose how they are taxed. LLCs that have multiple members, or owners, can be taxed as corporations, paying taxes as a business, or as partnerships, paying business profits and losses on their personal tax returns. Both corporations and partnerships have unique tax obligations and are recognized as business forms by the IRS. LLCs with only one member can be taxed as a corporation or as a sole proprietorship.
A single-member LLC that does not elect to be taxed as a corporation is classified as a “disregarded entity,” meaning it pays taxes like a sole proprietorship even though it has an LLC’s liability protections. The IRS disregards the LLC structure for tax purposes and the corporation essentially becomes a sole proprietorship in the view of the IRS. For income tax purposes, the LLC’s profits and losses are indistinguishable from the owner’s personal obligations, just as if the LLC was a sole proprietorship. Since the IRS disregards the LLC as an entity, the LLC does not pay taxes at the business level. In community property states, an LLC owned jointly by a husband and wife may also be treated as a disregarded entity for federal income tax purposes. Sometimes, an LLC may appear to be owned by just one person or by a married couple while it is actually owned by several investors. You can check the state’s records for the LLC to discover how many members it legally has. Typically, the LLC’s founding document, called articles of organization, must be registered with the state and list the LLC’s members.
Acquiring the LLC
Purchasing an LLC may not always be the wisest business decision, particularly when the business only has one owner. Before you acquire the LLC, you may want to consider whether the business is currently profitable and, if so, why it is profitable. If the business’s success is closely tied to the owner’s personal relationships, it may not be successful in someone else’s hands. For example, a photography business that depends on the reputation of the sole photographer and owner may not survive with someone else behind the camera. Alternatively, the business simply may not be profitable enough to justify purchasing it. You could determine the profitability of the business by examining the business’s accounting records, including its debts, liabilities and assets. You might also consider the business’s intangible value, such as the company’s reputation in the community.
If you decide to buy the LLC, you and the LLC’s current owner can formalize the sale with a purchase agreement in which you agree to buy all of the owner’s interest in the business for a certain price. The purchase agreement may include the price, date on which the sale becomes effective, and any statements or warranties you want recorded. Generally, any promises made between a buyer and seller should be written into the purchase agreement. Since LLCs are creatures of state law and have to be registered with the state, your state will likely require you to register a change or amendment to the LLC’s articles of organization because of the purchase. The LLC’s current articles should list the previous owner as the sole member, and you must update that record to replace the old owner’s name with yours. This may involve filing a form with your secretary of state or business registrar and paying a filing fee.