Transferring ownership interests in an LLC can be quite easy or moderately challenging, depending on how you organize your company. First, you must understand that LLCs are entities of the state. Therefore, individual states determine the rules that dictate how LLCs are organized and operate. Second, LLCs typically follow regulations similar to partnerships with the added feature of limited liability, like corporations, for the owners. Owners, who are known as members, have the flexibility to design other operating issues as they see fit -- including transfer of ownership interests.
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Examine your state LLC regulations. Many state statutes mandate that ownership interests can only be transferred with the unanimous consent of all other owners. However, you can design the ownership transfer conditions for your LLC by including language in your operating agreement. Often, state regulations, however restrictive, can be modified or changed by the LLC operating agreement. Including clearly stated "buy and sell" language outlines how members can transfer their ownership share of the LLC.
State a valuation method that all members agree upon. Even liberal buy/sell language in an operating agreement is troublesome if not combined with an acceptable method of LLC valuation. Absent this language, LLC members can have serious problems with transferring ownership. Neither seller nor buyer will know what the ownership share is worth. If the seller believes the share is worth $10,000, but the buyer believe it is worth $1,000, a "communications" problem will develop. The criterion for an LLC evaluation is less important than the lack of a method to value an ownership interest.
Create an operating agreement that either makes it simple or difficult for potential ownership buyers to make offers and sellers to accept, reject or negotiate buyer offers. Offers to purchase ownership in LLCs can be emotionally driven. The original LLC members must decide whether they want to make it difficult or easy to accept new owners. Should a member want to sell his ownership share, founding members should have decided on the ease or difficulty of transferring ownership at the LLC's inception and clearly stated their intention in the company operating agreement. If your LLC is a small business, you should eliminate all artificial transaction roadblocks if you want to make the transference of ownership an easy process.
Consider potential restrictions on transferring ownership at the organization of the LLC. For example, should LLC members desire to keep ownership within the original structure, you could stipulate that members can only sell/transfer shares to other existing members. Most state LLC regulations permit members to stipulate how ownership shares can be transferred upon sale, death, or other conditions. Use this feature to state how sales and purchases of ownership interests will proceed. LLC operating agreements can be modified or changed in the future should the wishes of the members evolve in different directions.
Tips & Warnings
- Clearly write your LLC operating agreement to make ownership transfer easy or difficult, depending on your preferences.
- Specify a valuation method that makes sense and is easily understandable.
- Don't assume your state regulations will allow you to transfer ownership as you intend. Read the statute.
References & Resources
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