How to Buy a Partner's Shares of LLC

By Larissa Bodniowycz, J.D.

How to Buy a Partner's Shares of LLC

By Larissa Bodniowycz, J.D.

Partners in a limited liability company (LLC) are called members, and each owns a portion of the business, called their membership interest. The partners may split ownership of the LLC equally or have disproportionate interests. This type of interest is the functional equivalent of shares in a corporation.

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At some point in its life, the company may want to buy back a partner's interest. If both agree to the purchase, they can transact the sale by following these steps.

1. Review rules and laws.

Before taking any other action, review the business' legal documents and the laws of the state where the LLC operates. The documents and laws may provide rules and processes to follow when a member sells their interest back to the company.

For most businesses, these rules appear in its operating agreement or in a buy-sell agreement among the partners. In most states, the relevant laws are available in the state's business code in the LLC chapter or subsection.

2. Determine a sale price.

Company documents may provide a formula for calculating the value of the selling partner's interest in the business. If they do, follow the formula to calculate the price that the member needs to be paid.

If the documents do not provide a calculation, the LLC and departing individual must reach an agreement on the price. To help facilitate a fair agreement, it is often advisable to hire a disinterested third party to do a professional valuation of the membership interest.

3. Draft transfer documents.

Once they agree upon a sale price and other key terms, representatives of the business and the partner must create and sign the appropriate transfer agreements. In most cases, the required documents include a sales agreement and written consent from all the LLC members. At this stage, it is important that the business and departing individual do not have the same attorney or other professional advisors, because they have different interests in the sale.

4. Effectuate the transfer.

Once the terms of the transfer are agreed upon and the appropriate documents signed, both parties must comply with their respective duties to effectuate the transfer. In many cases, this simply requires the LLC to make the agreed upon payment to the member.

5. Update company records.

Once both parties execute the transfer, it must be properly recorded in company and state records. Recording the change helps avoid confusion among future partners, state agencies, or creditors about who owns the LLC.

The company should update capital accounts to reflect the change in membership and remove the departing person's name from any lists of partners. At the state level, the business should remove the departing individual's name from any state records that list the company's members. If their name appears on lists on any other official or public documents, it must be removed from those.

Disagreements Between the LLC and the Departing Member

If the two parties do not agree on the sale of the member's interest, if the two cannot reach an agreement on price, or if a member wants to sell to someone other than the business, the steps are slightly different. In these often complicated situations, the parties involved should consult a small business attorney for help.

If both the LLC and the departing partner are on the same page, the process for buying out an individual is relatively straightforward. The company's legal documents or state laws may offer a framework for the process, and once a share price is agreed upon and documents drafted and signed, the only tasks that remain are to finalize the transfer and update any records related to the company as necessary.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.