Can I Change the Owners of an LLC?

By Brette Sember, J.D.

Can I Change the Owners of an LLC?

By Brette Sember, J.D.

An LLC (limited liability company) is a type of business that is owned by its members. As its name indicates, an LLC provides members with personal liability protection from the actions of the business and any of its debts. The members can be active managers of the LLC or simply passive owners. Members can be added to, or removed from, the LLC. Each state has its own rules for adding or removing LLC members.

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Operating Agreement

An LLC's operating agreement is a document created when the LLC is set up. It lays out the members' responsibilities and also sets the terms for how members can be added to, or removed from, the business. The operating agreement may specify that if a member wants to sell their ownership interest in the company, they have to give the other members the first option to buy it. The operating agreement is binding on all members and its procedures must be followed.

Voluntary Withdrawal

The operating agreement should specify the procedure to follow when a member wishes to withdraw, to transfer, or to sell their membership. If the agreement does not discuss this aspect of the operations, then the LLC must dissolve and reform without the member who wishes to leave.

Removal of a Member

State laws specify circumstances in which LLC members can be removed involuntarily, for circumstances such as, for example, a member's personal bankruptcy or a member making significant assignments to creditors. It is also possible to remove a member based on egregious conduct (like embezzlement) within the LLC, as long as the operating agreement provides for this. It's important to review both your state law and your operating agreement to determine the circumstances and procedures required for removal.

Death of a Member

When the member of an LLC dies, their ownership interest is inherited by their heirs. If the member has a will, the will dictates who will receive the ownership. If the member has placed the ownership interest in a trust, the trust will distribute the membership. If the member dies without a will or trust, state intestacy laws determine who will inherit the membership. Note that the operating agreement can place restrictions on the inheritance of a membership, such as the stipulation that the other members have the option to buy it first. It can also require that the LLC be dissolved if a member dies. Usually if a membership is inherited, the heir does not have voting or management rights in the LLC. They only have the right to share in the profits or losses of the business.

Single-Member LLCs

If your LLC has just one member (that is, you), you can sell the LLC to another person or company. If you die, your state laws determine whether your ownership passes to your heirs or whether the LLC is automatically dissolved.

Procedures

If you wish to add a member to or remove a member from your LLC, the members should do so in writing. Your state law or your operating agreement may require this, but in general it is a good idea to do so in writing, even without that requirement. Your state may have forms you need to file to indicate the change in ownership.

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