If you’ve decided to sell or transfer your LLC ownership rights in Arizona, it’s important to do it the right way. Compared to corporations, the process for transferring ownership of an LLC is a bit different. Here’s why:
- Shareholders are the owners of a corporation. Stocks can be freely bought and sold, with ownership changing accordingly.
- Individual members are the owners of an LLC. Unless you’ve made other arrangements in your operating agreement, each member holds equal ownership rights in the LLC, and it’s not possible to transfer ownership rights without the consent of all members.
- LLCs also have fewer legally required formalities, which can make them harder to transfer or sell.
In this guide, you’ll learn a few different ways to transfer ownership of your LLC in Arizona.
First Things First: Arizona Operating Agreements
An operating agreement (OA) serves as the outline for how your LLC will be structured and run on a day-to-day basis. Operating agreements typically include vital information such as:
- Rights and responsibilities of members
- Percentage interest (ownership) of all members
- Buy-sell provisions for what will happen if a member wants to transfer ownership, becomes disabled, or dies
- Guidelines for operation
- Allocation of profits
- Rules for meetings and taking votes
Unlike some jurisdictions, Arizona does not require LLCs to have an operating agreement at the time of formation. However, it’s a very good idea to craft one anyway because it can help you avoid many legal headaches down the road. Reasons to have an OA include:
- Avoiding state default rules. These rules apply to your LLC if it doesn’t have an OA, which can cause financial losses and more problems for you or other members.
- Providing structure to your LLC. Without an operating agreement, there are no clear rules about your business’s handling of finances, how to settle disputes, and many other important issues.
- Verifying your status as an LLC. An OA can help further prove to courts that your business is legally an LLC.
Refer to the buy-sell provisions in your OA for guidance on how to transfer ownership of your LLC. ZenBusiness can help you by providing an operating agreement to make the process easier.
There are two ways to transfer ownership of an LLC without legally dissolving it: a partial sale (also called a buyout) or a full entity sale.
Partial Transfer: The Buyout Provision in Arizona
This method allows a member to sell their interest in the LLC and split ownership of that interest among remaining members. The terms of a buyout should be specified in a document called the buy-sell agreement, which determines what happens when a member wants to leave or a new member wants to join the LLC.
The buy-sell agreement typically details:
- The price of each member’s interest in the LLC.
- The valuation method used by the LLC, such as book value (assets minus liabilities) or fair market value as determined by a third-party appraiser.
- Payment terms for members who exit the LLC.
- Who’s allowed to buy an interest in the LLC.
- Whether or not a departing member can force the others to buy them out or purchase their interest at a loss.
- Events that can trigger a buyout.
- Right of first refusal, which allows a member to sell their interest to a third party as long as other owners have waived their right to purchase the interest first.
Your company’s operating agreement should include detailed provisions for buying and selling interest in the LLC. You’re not legally required to have a buy-sell agreement in Arizona, but it’s highly recommended. Having a comprehensive and clearly written OA is the best way to avoid disputes among members when you transfer LLC ownership in Arizona.
Full Transfer: Selling an Arizona LLC
In some cases, you may want to sell the entire LLC to a third party. You’ll need to:
- Consult your OA first. It should have detailed information about how to handle full transfers and sales to outside entities.
- Get member approval. Every member of your LLC needs to agree to the sale (unless you made other arrangements in your OA).
- Determine the buyer’s interest. Some buyers may wish to purchase the whole LLC, and some might only want to buy its assets.
- Draft and execute a buy-sell agreement with the buyer. This document spells out the terms of the sale, such as what assets are included, the timescale of the sale, and other important details.
Other Possible Issues
There are a few other common situations to consider before selling or transferring your LLC.
Death of a Member
If a member dies, their interest passes on to their surviving spouse or children, but only as benefits (such as a percentage of profit). Heirs do not have a right to management interest in an LLC, and the remaining members may want to initiate a buyout of the deceased’s next of kin.
Dissolution/Reformation in Arizona
Dissolving and reforming the LLC may be the best choice in some circumstances. It enables new members to join and former members to leave with their share of interest.
File proper change of ownership paperwork in Arizona
When an LLC’s members have changed, you’ll need to file your Articles of Amendment with the Arizona Corporation Commission.
LLC transfer of ownership may seem overwhelming, but a well-written operating agreement can help the transition go smoothly. If you encounter problems with buyers or other members, seek the advice of a professional business attorney to help you resolve them.
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 Arizona LLC?
The LLC’s operating agreement should have provisions for members who want to sell their interest in the company. See its operating agreement for sales terms and other details.
- Can an Arizona LLC issue new membership interests?
Membership interests (also called stakes in ownership) can be issued so long as all members of an LLC agree to them.
- How do I change ownership of an Arizona LLC with the IRS?
To notify the IRS of a change in ownership, file Form 8822-B, Change of Address or Responsible Party – Business. You’ll need to report new ownership to the IRS within 60 days of the change.
- Can an Arizona LLC member have no ownership interest?
By definition, members are owners of an LLC and typically have some level of ownership interest. The LLC determines how interest is split among members. For example, a member may have no economic interest but still hold voting rights. This is a complicated topic, so consult an attorney for help with your specific situation.