If you need to transfer limited liability company (LLC) ownership interest in Arkansas, you have a more complex task than if you were doing the same with a corporation.
Corporate ownership involves exchanging shares of stock, which can be transferred easily through straightforward buying and selling. Also, corporations have certain formalities to their structure that make selling and transferring ownership easier.
An LLC’s ownership, on the other hand, rests with the members of the LLC. A member’s rights usually can’t be transferred without the approval of all the other members. In addition, Arkansas requires LLCs to report some changes in management to the state. This article outlines the basics of how to transfer LLC ownership in Arkansas.
Are you considering forming an LLC in Arkansas? ZenBusiness can help streamline the process through our LLC formation services.
First Things First: Operating Agreements
While Arkansas requires LLCs to file Articles of Organization with the state as a part of forming the business, it doesn’t require LLCs to submit operating agreements. However, an operating agreement is a vital document for any LLC.
Your company’s operating agreement should discuss the rules under which the LLC operates. It should list all members of the company with their membership interest (or the percentage of the LLC they own). The operating agreement also provides a framework for the management of the company, including payment of taxes, distribution of profits, and procedures for changes to the company.
If you have an operating agreement in place, it should contain directions for transferring ownership. All you have to do is follow those directions. In the unlikely event that your operating agreement doesn’t contain those instructions, you’ll have to follow Arkansas law by default.
When you want to transfer LLC ownership in Arkansas, you have two options. You can sell the entire LLC, or you can conduct a partial sale of the ownership interests of one or more members. This is often known as a buyout.
If you’re just getting started with your Arkansas LLC, check out the operating agreement template from ZenBusiness to make sure you’re touching all the bases you need to cover.
Partial Transfer: The Buyout Provision
If you choose the buyout option to transfer LLC ownership in Arkansas, you need to create a buy/sell agreement. Under this contract, the remaining members of the LLC will buy the ownership interest of the member who’s leaving. That member’s ownership interest can be split among the remaining members.
Your Arkansas operating agreement should cover what’s required in your buy/sell agreement.
Full Transfer: Selling Your Arkansas LLC
You can also choose to sell your entire business to a new owner. Your operating agreement should also contain instructions for this transaction, whether your buyer is interested in your entire company or just its assets.
All the members of your LLC must consent to this type of sale. Because this kind of transaction can be complicated, hire an attorney who’s familiar with business contracts to take care of all the details properly.
Other Possible Issues
Death of a Member
It can be a real shakeup for the members of an LLC if one of the members dies. It’s important to take the correct actions if this occurs.
While the deceased member’s ownership typically passes to their next of kin, those new members receive only the benefits and percentage of profit accruing to the deceased. Heirs to an LLC membership have no management interest in the company. Typically, your best course of action is to buy out the heirs, as outlined above.
Dissolution and Reformation
Sometimes several members want to give up their LLC membership all at once. While you could handle this through multiple partial transfers, there’s a simpler option. Instead, consider dissolving the LLC and forming a new one. This is a particularly strong choice if you’re going to replace the departing members with new members, as you can take care of all the necessary tasks at the same time.
File proper change of ownership paperwork
In Arkansas, you’re not required to notify the state if you change the ownership structure of your LLC. However, in many cases, transferring LLC ownership may affect your management structure. That change must be reported to the Arkansas Secretary of State. Use your annual franchise tax report to make this notification.
Your operating agreement should help set you on the path through the sometimes thorny issues surrounding LLC transfer of ownership. If you foresee any issues that may complicate this already complex transaction, hire an attorney who’s familiar with business contracts to guide the way.
If you find you need an operating agreement, ZenBusiness can help. Check out our operating agreement template to make sure you’re including all the provisions you’ll need.
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 Arkansas LLC?
You may sell your interest in an LLC. The LLC’s operating agreement should provide the instructions for how to do this. Typically, all other members of the LLC must consent to the sale.
Can an Arkansas LLC issue new membership interests?
If the entire membership of the LLC is unanimously in favor of issuing new memberships, the LLC can do so.
How do I change ownership of an Arkansas LLC with the IRS?
You must notify the IRS of internal changes to your LLC only if you change its tax classification or if you’ve dissolved the business. The IRS only has three classifications for businesses: corporation, sole proprietorship, or partnership. It doesn’t consider LLCs to be a separate classification, so LLCs must choose one of those three options for tax purposes. Use IRS Form 8832 (Entity Classification Election) to make this change.
Can an Arkansas LLC member have no ownership interest?
No. Every member of an LLC automatically has an ownership interest in the business, regardless of their actual participation in the activities of the company.