Unlike shares of stock in a corporation, the ownership interest, or interest agreement, in a limited liability company cannot be freely sold or gifted to another party. LLCs are modeled after partnerships, and the law says you cannot force one person to enter into a partnership with another. Ownership interests in LLCs can be transfered to another person only if the existing members of the partnership agree and if the state law that governs the LLC allows full partner substitutions. In some instances, the law allows the transfer of the ownership interest, but the transaction strips the new person of any right to participate in running the LLC. He has the right only to his proportionate share of profits or losses.
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Refer to the buy/sell provisions of the LLC's operating agreement. An operating agreement is a contract between the partners, known as members, of a company. Any provisions that have been agreed to in writing by the members regarding transfer of ownership interest control what you are able to do with your share of the company. Many LLCs require a withdrawing member to sell his interest to the remaining members at a fair price. If there isn't an operating agreement, refer to your state law on corporations.
Draft a sales agreement between you and any party authorized by the remaining members to receive your share of the company. There is no specific format for the transfer of an ownership interest in an LLC. You can find serviceable templates by conducting an Internet search, or you can draft a simple sales document from scratch. Include the terms of the transfer, including the date, interest percentage and sales price. Sign and notarize the document in exchange for payment.
Consult the limited liability company statute in the state where the LLC was formed, if the LLC does not have an operating agreement with buy/sell provisions or if you cannot reach an agreement regarding the transfer of your interest with the other members. The statute contains default provisions that control the operation of LLCs in the absence of an operating agreement. Some states prohibit transfers of an interest in an LLC entirely, requiring the LLC to dissolve and pay out the members. The remaining members can then form a new partnership to proceed. Other states allow a member to transfer his interest, but the new owner has rights only to the profits and losses and does not have the status of a full member. Still other states do not allow transfers to outside parties but allow a withdrawing member to demand to be bought out at a fair market price.
Proceed based on the ownership transfer provisions of the state law. Provide the other members with a formal written notice of your desire to transfer your interest. Depending on the state law, either provide the members with a copy of the sales agreement between you and an outside party or request to be bought out. If the members cannot agree upon a fair price for your interest, file a petition with the state civil court to have a judge set the price.
Tips & Warnings
- If the matter of the transfer of your interest in an LLC ends up in court, the judge has wide latitude to set a sales price for your interest or to dissolve the company entirely, supervising the sale or distribution of assets to members. If the court dissolves the company, the remaining members have to form a new LLC to continue in business.
References & Resources
- SBA.gov: Limited Liability Company (LLC)
- FindLaw: Making LLC Operating Agreements
- Citizen Media Law Project: Limited Liability Company
- University of Pennsylvania Law School: Uniform Limited Liability Company Act (1996)
- Buyout Agreements: Changing LLC Ownership
- U. of Penn. Law Review: The Role of the Court in Balancing Contractual Freedom...
- Entrepreneur: LLC Basics
- Niesar & Vestal LLP: Legal Resources -- Management and Operation of LLCs
- Turnaround Management Association: Limited Liability Companies: Important Exit Considerations; Wendell H. Adair, Jr., et. al; September 1996
- Small Business Law Firms: Buy/Sell Agreements: Business Exit Strategy
- NJ CPA: Practical Considerations for Handling Shareholder and LLC Member Disputes
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