How to Sell a Percentage of an LLC

By River Braun, J.D.

How to Sell a Percentage of an LLC

By River Braun, J.D.

A limited liability company (LLC) is a common business entity formed by single individuals or multiple parties. Choosing this type of business entity has several advantages, including the flexibility to operate the business as you desire, ease of formation, and lack of formal corporate rules.

Woman using a laptop and holding paperwork

LLCs are owned by members, and their operations are governed by an operating agreement, including the member's responsibilities and authorizations. While it may not always be easy to add a member, or sell a percentage of the business, it can be done in just a few steps.

1. Review the Operating Agreement

Many operating agreements set forth various procedures, including those required for adding new members. If the agreement does in fact include a process for doing so, then you will need to follow what is outlined in the agreement.

2. Understand State Requirements

If the agreement does not contain a provision for adding new members, look to the laws in your state. Most states require that all members unanimously vote to add a new member when the LLC operating agreement failed to include a how-to process in doing so.

3. Determine New Member Rights

In some cases, this type of business entity is operated by members who have equal rights to make decisions and bind the business legally in contracts. In other cases, however, an LLC is managed by representatives chosen by the members to make decisions and manage the daily operations. In this case, the owners will have no such authority, but rather transfer the role to the manager(s). You must decide what rights the new member has and amend the operating agreement, if necessary, to provide for those rights.

4. Make an Offer and Draft a Purchase Agreement

Before making an offer to the new member, you must determine the value of the company in order to come up with the value of the interest you will be offering that person. Often, members use an outside service to appraise the value of the business so that they can substantiate the price for the interest in the LLC. While you don't want to undersell the interest in your company, the price must be fair.

If the new member agrees to the purchase price, draft a purchase agreement. It should be detailed and include the purchase price, the ownership percentage, and the type of authority the new member will have. You may also want to consider including provisions related to non-compete and confidentiality agreements.

After all parties execute the agreement, deposit the money from the new member into the company's operating account.

5. Update the Operating Agreement and Capital Accounts Ledger

If you have not updated the agreement, you should do so immediately to include the new member's information, including their name, address, and ownership percentage. You also need to update the capital accounts of the business to track the contributions and distributions to the new member.

6. Update State-Required Forms

LLCs are governed by state law, which may require you to update the information regarding new members. Check with your Secretary of State to learn if your state requires that you report such information.

If you are ready to sell a percentage in your LLC to a new member, follow these steps. Additionally, understand your state's rules and regulations concerning the process. Most importantly, update your operating agreement to reflect the new member's information to ensure that all parties involved are informed of the changes to the company's ownership.

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