It’s not a simple task to transfer LLC ownership in Alabama. In some ways, it is more difficult than transferring ownership in a corporation. That’s because a corporation’s ownership is vested in shares of stock, which is easily transferred or sold to qualified buyers. In contrast, an LLC’s ownership is vested in the members of the LLC, and members’ rights aren’t transferable without the full consent of the other members. In addition, LLCs lack the formalities required of corporations, which also makes the sale and transfer of ownership more complicated.
If you’re thinking of forming an LLC, ZenBusiness is ready to help. Check out our LLC formation services to see what we can provide to help you get your business started.
First Things First: Operating Agreements
When you formed your LLC, you likely created an operating agreement (OA). This document provides the structure for your company, detailing the working relationship between the LLC’s members and explaining the financial and management rules under which the company operates.
Among the topics typically covered in an LLC’s Operating Agreement are the owners’ percentage of ownership, rights, responsibilities, and shares of profit or loss. In addition, OAs should detail what happens in the event that one of the members leaves the company.
As of 2015, the state of Alabama doesn’t require LLCs to have a written operating agreement and accepts oral or implied agreements. However, most companies create written OAs when the business is formed.
If your LLC has an OA, it should include directions for the transfer or sale of ownership in the LLC. Follow those directions to handle your transaction. If those directions aren’t included in your OA, you must default to Alabama law for the transaction.
You have two choices for transferring an interest in an LLC without legally dissolving the company. You can conduct a partial sale, also known as a buyout, or you can conduct a full entity sale.
If you’re just forming your LLC in Alabama, ZenBusiness provides a very helpful operating agreement template to help you get started right.
Partial Transfer: The Buyout Provision
One way to transfer LLC ownership in Alabama is to have the existing members of the LLC buy out the partner who wants to leave. The leaving partner’s ownership interest is then split among the remaining LLC members.
To handle the transfer of ownership this way, you need to create a buy/sell agreement. Your operating agreement should contain instructions for this agreement. Your comprehensive, detailed OA helps you to avoid potential discord among the members of your LLC and gives all members an opportunity to assert their rights appropriately.
Full Transfer: Selling Your Alabama LLC
Another option for transferring LLC ownership in Alabama is selling your entire company to a third party. Your buyer may want the whole business, or your buyer may only be interested in your company’s assets. Again, your OA is your guide if this is the route you choose.
If you plan to sell your entire LLC, all members of the business must consent to the sale. Without full consent, the sale cannot occur. Selling an entire LLC is a complex process, and you should consider consulting an attorney to help with the transaction to make sure all the details are handled legally and correctly.
Other Possible Issues
Several other issues can arise that involve the transfer of LLC ownership.
Death of a Member
Should a member of your LLC die, their interest passes on to that member’s spouse or children, depending on previously made arrangements. However, whoever receives membership in an LLC due to death only receives the deceased person’s percentage of profit and other benefits. The inheritor of a membership interest in an LLC has no right to assert any management interest.
Due to those legal considerations, the best option in this situation is usually to buy out the next of kin who has inherited the LLC membership, using the partial transfer option outlined above.
Dissolution and Reformation
What if you have several members who want to leave the LLC at the same time, all transferring their ownership? You could do several partial transfers, but sometimes that kind of transaction is more stressful or complicated than it’s worth.
In this case, a simpler option is often to dissolve the LLC and form a new one. This way, members who want to leave can take their investments with them. You can also easily allow new members to join your LLC with this option.
File proper change of ownership paperwork with Alabama
The state of Alabama requires you to keep it notified when you make major changes to your business. Make sure that you file a Domestic LLC Amendment form with the Alabama Secretary of State’s office to register your business’s changes with the state.
LLC transfer of ownership isn’t always straightforward. Having a clear, well-drafted operating agreement is key to a smooth transition. If you run into issues, either with your buyer or a member of your LLC, seek the professional advice of an attorney familiar with business contracts.
If you’re starting an LLC or need to redraft your operating agreement, ZenBusiness’s operating agreement template is a great place to start.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Can I sell my interest in an Alabama LLC?
Yes. Any member of an LLC can sell their interest in the company, though the other members of the LLC may have to approve the sale. The LLC’s operating agreement governs how the sale is handled.
Can an Alabama LLC issue new membership interests?
Yes. However, the existing members of the LLC must be unanimously in favor of the change.
How do I change ownership of an Alabama LLC with the IRS?
While LLCs are registered with their state governments, the IRS doesn’t recognize them as a classification of business entity. Every LLC must choose to be classified as a corporation, a partnership, or a sole proprietorship with the IRS. The only reasons to notify the IRS of any internal changes in your LLC are if you have changed the business’s tax classification among those three options, or if you have dissolved the LLC and started a new one.
Can an Alabama LLC member have no ownership interest?
No. All members of an LLC have ownership interests, even if they don’t participate in the business actively. However, members can employ managers, who function as officers of the LLC but who have no ownership interest.