Can I Change the Owners of an LLC?

By Maggie Lourdes

A limited liability company (LLC) is a type of business entity that is owned by its members. The members are typically insulated from the debts and liabilities of the business. Members may actively manage an LLC or may assume passive roles in the company. Ownership of an LLC can change by removing or adding members. Generally, members can voluntarily relinquish their interests or they may be removed involuntarily under certain circumstances. The rules for changing LLC ownership interests are governed by state law, which varies from one state to another.

Operating Agreements

An operating agreement is usually prepared when a limited liability company is formed. In the operating agreement, members outline the terms for future changes in company ownership. The operating agreement should be carefully reviewed and followed when changing LLC members. For example, the document will often stipulate that before a member can sell his ownership interest in the LLC, he must give other members the first option to buy. Changing ownership in violation of an operating agreement can result in unnecessary litigation and costs.

Involuntary Changes

State laws describe events that may trigger the involuntarily removal of an LLC member. For example, New Mexico law states if a member claims bankruptcy, that individual's membership in the LLC is automatically terminated. If a member makes significant financial assignments to creditors, this may also be grounds for loss of membership. Operating agreements may be drafted to override certain trigger events set in state law. For this reason, operating agreements and state law should be read in conjunction with one another.

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Death of Members

Ownership of an LLC can be inherited by a deceased member's heirs. It may also be transferred to the beneficiary of a deceased member's trust. If a member dies without a will or trust, the law distributes a member's ownership interest through the state's intestate succession laws. Generally, a deceased member's spouse and children would take his intestate interests. If no spouse or children survive the deceased member, LLC ownership rights would pass to the member's next closest blood relatives.

Documents and Filings

Generally, adding or removing an LLC member is evidenced by a written instrument and signed by its members. Even if an operating agreement or state law does not require that a particular ownership change be in writing, it is wise to do so, as it offers clarity and proof of the change. Some states, such as Arizona, require forms to be filed with the state when certain members are removed or added. The particular requirements of when forms must be filed vary and should be researched on a case-by-case basis to ensure compliance with your state law.

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References

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When someone declares bankruptcy, his financial assets may be claimed by a bankruptcy estate and used to settle his debts. An example of a financial asset that could be transferred to personal debtors is an ownership share in a limited liability company. LLCs are state-approved businesses with a relatively small number of owners, otherwise known as members. The other members of the LLC may not want to have a new owner in the business due to the other member’s bankruptcy. Therefore, the LLC may be structured in a way to address this possibility.

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Since business relationships don’t always work out as planned, it may become necessary to terminate certain relationships. In a limited liability company, or LLC, the owners, known as members, may change periodically. When one of those members wants to leave the LLC, doesn’t live up to his responsibilities or passes away, the other members may remove him from membership by following the LLC’s operating agreement.

Can I Change an LLC From Members to Managers?

A limited liability company is an independent legal entity formed under your state’s laws. If you choose to organize your business as an LLC, you must also decide whether your LLC should be managed by its members or by non-member managers. While it can be a hassle to alter this decision later, you can change your management structure after you start your business.

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