Transferring Ownership of an LLC

The act of transferring ownership of an LLC, particularly as it relates to adding new LLC members or selling off the company as a whole, will depend on the provisions outlined in the LLC's operating agreement.

This guide looks at some of the reasons an LLC may need to transfer its ownership and whether it's the right path for your business.

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Disclaimer: This information is provided for educational and entertainment purposes only. Please consult a lawyer for legal advice.

Reasons to Transfer LLC Ownership

A limited liability company may need to change its ownership structure for a variety of reasons, including:

• Departure of an existing member
• Addition of a new member
• Ownership transfer to a family member
• Sale of the company by its existing members

How Do You Transfer LLC Ownership?

There are two paths for transferring ownership: one for selling the entire LLC, and one for partial transfer of interest.

Transfer Partial Interest in an LLC

Transferring partial interest occurs when only a portion of ownership is being sold. This may be because a new member is being added, an existing member is leaving, or a member wishes to sell some of their current ownership percentages. The typical steps for this procedure include:

1. Review your LLC's internal documents. Your Articles of Organization and operating agreement should have buy-sell provisions that dictate the transfer process. If you do not have these provisions in your documents, consult with your state's business services division.
2. Follow the buy-sell agreement procedures. This may include creating a resolution for the sale, the sale's timeline, and obtaining agreement from the other LLC members. Make sure to document these proceedings.
3. Update your business with the state. Once the transfer of ownership is complete, you will need to update your Articles of Organization with your chosen state of filing (including those that you operate as a foreign LLC in). This can typically be done either by filing Articles of Amendment or by filing your state's annual report.
4. Notify the IRS. When the "responsible party" of an LLC changes (i.e., the persons with control over the LLC's funds and assets), you must file Form 8822-B.
5. Notify other third-party institutions. This may include banks, lenders, net-30 vendors, registered agents, etc.
6. Update your operating agreement. Once your LLC has made the necessary ownership changes, make sure to record the new membership shares and interests in your operating agreement.

Note that if you do not have a buy-sell provision in your operating agreement, your state may require you to dissolve your LLC.

Transfer All Interest in an LLC

You can also transfer the entire ownership of your LLC by selling it to a third party. This is typically a more complicated process that should be completed with an attorney, but some of the steps are similar to a partial transfer of ownership. The basic steps include:

1. Review your company documents.
2. Evaluate your business's assets. Before discussing sales with potential buyers, you must first value all property (e.g., real estate, intellectual property, future revenue projections, etc.). While you can do a self-evaluation, using a business valuation expert may help with accuracy.
3. Make a sales agreement with the buyer. This contract should clearly state what is being purchased, the existing liabilities, the sale's timeline, and that the current LLC members agree to the sale.
4. Inform your state of the sale. You will need to record the sale with your state's Secretary of State (or applicable business services division). If you do business in other states as a foreign LLC, you will need to notify them as well.
5. Notify the IRS.
6. Notify other third-party institutions.

Transferring Family LLCs

A family LLC is an LLC that is formed by family members, typically for estate planning purposes. The business structure is similar to that of a regular LLC, but family LLC owners are typically senior members of a family that sets up procedures for transferring assets to other members (e.g., children, grandchildren, etc.)

When it comes time for a transfer of ownership, family LLCs can use similar methods to regular LLCs:

• Buy-Sell Agreements: If the family LLC has buy-sell provisions in their operating agreement, they can transfer ownership to other family members by selling them their ownership percentage.
• Living Trusts: LLC ownership can be transferred into a living trust by transferring the business itself into a trust and naming the desired new owner as successor to the trust.
• Gifting: LLC owners can gift their ownership to another family member. This method may require the owner to pay federal gift taxes on any amount that exceeds the exemption limit.
• Selling the LLC: To completely hand over ownership to other family members, family LLC owners can sell their business. Note that the sale must be for a reasonable price when accounting for business valuation, or it may be considered a gift.

Transferring vs. Dissolution

If the members of an LLC do not wish to continue operating their business, they can choose to either transfer ownership of the LLC or terminate the LLC by way of dissolution.

• Transferring business ownership, as noted above, is when the members sell part or all of the entity. The LLC entity remains intact but with new owners.
• Dissolving an LLC terminates the LLC's duration and informs the state, the IRS, and the LLC's creditors that the business is no longer active. With voluntary dissolution (i.e., dissolution that is voted and agreed upon by the LLC's members), the owners typically must file a Certificate of Dissolution with the state and request a tax clearance.

What to Do After Transferring LLC Ownership

Depending on the nature of your ownership transfer, there are some steps you can take afterward to help you plan for your next business step:

• Update your operating agreement. If you've only transferred partial LLC ownership, now is the time to make sure that your operating agreement is up-to-date. Be sure to note the new membership percentages, any changes in duties, and any changes in member titles.
• Inform others of your changes (if applicable). If you've added or removed an owner from your LLC, make sure to update your social media profiles, your website, and any other platforms that advertise your owners' contact information.
• Start a new business. If your ownership transfer resulted in completely selling your LLC, consider your next business move. Find a new business idea and start researching how to form an LLC for your new company.

Frequently Asked Questions

Can an LLC be sold or transferred to another person or entity?

Yes. You can choose to transfer partial business and membership interests, or you can elect to transfer the entire business by way of a sale.

How long does it take to sell my LLC?

The timeline for selling an LLC can depend on whether it's a full transfer of ownership interest or a partial transfer. Many experts predict that selling a small business in its entirety can take at least six months in order to properly transfer assets and update the entity's filings.

What happens when an LLC changes ownership?

When an LLC fully changes ownership, the previous members are no longer responsible for the company. LLCs that undergo a partial transfer (i.e., a new member joining or an existing member departing) will have to update their operating agreements in order to account for new member interests and duties.

How do you remove the owner of an LLC?

In a multi-member LLC, members vote on the removal of an existing member and update their operating agreement accordingly. A single-member LLC, because they only have one member, may have to either sell their business, add new members and transfer business ownership, or dissolve it completely.

How many owners can an LLC have?

There are no limits on how many members a multi-member LLC can have. By necessity, a single-member LLC only has one member.

What does ownership in an LLC mean?

The owners of a limited liability company are known as its members. An LLC member is an individual that has contributed capital to the company and typically has voting rights within the company.

What is a business ownership agreement?

A business's ownership agreement is the document that establishes that governs the business's management and structure. For LLCs, this document is known as an operating agreement.

How do I change ownership of an LLC with the IRS?

If the responsible party for your LLC has changed with the transfer, you will need to complete Form 8822-B (Change of Address or Responsible Party).

Do I need a new EIN if my LLC changes owners?

The IRS states that LLCs do not have to get a new Employer Identification Number (EIN) if they have changed the number of members.

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