How to Transfer Ownership in an LLC

By William Pirraglia

Transferring ownership interests in an LLC can be quite easy or moderately challenging, depending on how you organize your company. First, you must understand that LLCs are entities of the state. Therefore, individual states determine the rules that dictate how LLCs are organized and operate. Second, LLCs typically follow regulations similar to partnerships with the added feature of limited liability, like corporations, for the owners. Owners, who are known as members, have the flexibility to design other operating issues as they see fit -- including transfer of ownership interests.

Step 1

Examine your state LLC regulations. Many state statutes mandate that ownership interests can only be transferred with the unanimous consent of all other owners. However, you can design the ownership transfer conditions for your LLC by including language in your operating agreement. Often, state regulations, however restrictive, can be modified or changed by the LLC operating agreement. Including clearly stated "buy and sell" language outlines how members can transfer their ownership share of the LLC.

Step 2

State a valuation method that all members agree upon. Even liberal buy/sell language in an operating agreement is troublesome if not combined with an acceptable method of LLC valuation. Absent this language, LLC members can have serious problems with transferring ownership. Neither seller nor buyer will know what the ownership share is worth. If the seller believes the share is worth $10,000, but the buyer believe it is worth $1,000, a "communications" problem will develop. The criterion for an LLC evaluation is less important than the lack of a method to value an ownership interest.

Ready to start your LLC? Start an LLC Online Now

Step 3

Create an operating agreement that either makes it simple or difficult for potential ownership buyers to make offers and sellers to accept, reject or negotiate buyer offers. Offers to purchase ownership in LLCs can be emotionally driven. The original LLC members must decide whether they want to make it difficult or easy to accept new owners. Should a member want to sell his ownership share, founding members should have decided on the ease or difficulty of transferring ownership at the LLC's inception and clearly stated their intention in the company operating agreement. If your LLC is a small business, you should eliminate all artificial transaction roadblocks if you want to make the transference of ownership an easy process.

Step 4

Consider potential restrictions on transferring ownership at the organization of the LLC. For example, should LLC members desire to keep ownership within the original structure, you could stipulate that members can only sell/transfer shares to other existing members. Most state LLC regulations permit members to stipulate how ownership shares can be transferred upon sale, death, or other conditions. Use this feature to state how sales and purchases of ownership interests will proceed. LLC operating agreements can be modified or changed in the future should the wishes of the members evolve in different directions.

Ready to start your LLC? Start an LLC Online Now
How to Acquire an LLC
 

References

Resources

Related articles

How to Add an Entity to an Existing LLC

Limited liability companies can have as many members as they wish, or they can have one member. Corporations can be members of LLCs as well. LLCs formally set forth the rights and responsibilities of the founding members in their operating agreement before they open their doors, but this unique business structure allows the business to add or remove members at any time. Knowing how to add an entity to an existing LLC can help to make your membership transitions flow smoothly.

How to Add a Partner to a LLC Using Sweat Equity

The existing members of a LLC have great flexibility to establish the procedures for the admittance of new members. As long as the LLC operating agreement doesn´t prohibit it, new members can join the LLC on the basis of "sweat equity," rather than having to contribute cash or property to the business. This means that a new member promises to perform services in exchange for an ownership interest in the LLC.

Can an S-Corp Own an LLC?

An S corp may own up to 100 percent of an LLC, or limited liability company. While all but single-member LLCs cannot be shareholders in S corporations, the reverse -- an S corporation owning an LLC -- is legal. The similarity of tax treatment for S corps and LLCs eliminates most of the common concerns about IRS issues. Both structures "pass through" profits and losses to their owners for personal income tax submission.

LLCs, Corporations, Patents, Attorney Help

Related articles

How Do I Add Another Owner to My LLC?

The passage of time can bring about waves of change in the operations of any business. Shifts in market conditions, ...

How to Buy Stocks on Behalf of an LLC

A limited liability company is a distinct legal entity from its owners. Organized under state law, an LLC can take the ...

A Sample of an Operating Agreement for an LLC

While not usually a state requirement, an LLC operating agreement is its most important document. It contains the ...

Does an LLC Need to Place a Value on Each Membership?

An LLC should place a value on each membership. A membership interest is the value of all of the rights enjoyed by LLC ...

Browse by category
Ready to Begin? GET STARTED