How to Transfer Ownership of an LLC to a Corporation

By Christine Funk, J.D.

How to Transfer Ownership of an LLC to a Corporation

By Christine Funk, J.D.

It's not uncommon for a limited liability company, or LLC, to experience a change in ownership. Whether and how an individual, partnership, or corporation can transfer their ownership of this legal business entity to a corporation depends on the rules of the state in which the LLC formed, as well as the guidelines and procedures detailed in its operating agreement.

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Transferring LLC Ownership to a Corporation

In general terms, two factors determine how ownership of an LLC is transferred to a corporation:

  1. Legal rules in the state where the LLC was formed
  2. Guidelines and procedures detailed in the company's operating agreement

If you're interested in transferring ownership of your company to a corporation, here's what you would need to do.

1. Check the LLC's operating agreement, state law, and tax status.

When the LLC first registered with the state, it should have drafted an operating agreement. This document details buy and sell provisions (among other information and operating procedures) and usually includes the terms under which a member can transfer their ownership. A well-written operating agreement contemplates any number of situations that could call for a transfer of one's ownership, including:

  • Death
  • Divorce
  • Introduction of new partners
  • Judgments
  • Other legal reasons that trigger a buy-sell provision
  • Retirement
  • Sale of the company

An LLC can supplement or modify its operating agreement. If the company anticipates the departure of one or more members, it might wish to review its governing documents to address situations in which one owner wishes to transfer their interest.

Each state has its own laws that govern the LLC as a legal business entity. When there is no operating agreement or when the operating agreement does not have buy-sell provisions clearly outlined, some states require the LLC to dissolve upon the departure of a member.

Depending on the company makeup, it is possible that one owner's shares may not transfer to a corporation. For example, under current Internal Revenue Service rules, S corporations can only have individuals, certain trusts, and estates as shareholders. Partnerships and corporations cannot be shareholders. Thus, if the LLC files taxes as an S corp., transferring ownership interest from the LLC to a corporation is not possible.

 

2. Find a buyer and create a bill of transfer.

Once you have determined that you can sell your interest in the LLC to a corporation, identify a buyer and negotiate a price. It can be difficult to put a price on the value of a member's interest. An accountant can assist both parties in assuring the agreed upon price is fair to both the seller and the buyer.

Once you have agreed upon the price and any other terms and conditions of the sale, you must draw up the necessary paperwork to transfer LLC ownership to the corporation. When you sell an asset, sufficient paperwork must exist to show the government that the asset has indeed been sold. This is true for tax purposes as well as any potential bankruptcy action, divorce action, or other civil judgment.

3. Update certificates with the state.

Make certain to update the certificate of organization to reflect the transfer of ownership. These updates should be filed with the Secretary of State or other comparable authority in the state where the LLC exists.

Once you've determined that it's possible to transfer LLC ownership to a corporation, you must follow the appropriate steps to carry out the transaction. Regardless of the size of the businesses in question, following procedures is crucial for legal, tax, and business reasons.

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.