Although transferring ownership interests in a California limited liability company (LLC) is possible, it’s not simple. Unlike corporations where shareholders can freely buy and sell their ownership interests (i.e., stocks), LLC members need the approval of all other members to transfer ownership.
What makes the transfer of LLC ownership in California even more difficult is the lack of required formalities. Corporations have set rules they need to follow, but LLCs are more flexible. However, this flexibility actually makes it harder to transfer or sell ownership interests.
If you are still within the process of forming your California LLC, ZenBusiness offers excellent tools through our LLC formation service, as well as compliance and other services that can help set you up for future success. The purpose of this guide is to help you know what to think about when deciding how to transfer ownership of an LLC in California.
First Things First: California Operating Agreements
An operating agreement (OA) is the blueprint for your LLC. This binding document describes the rules of operation and management for your business. It typically includes information about the following:
- Relations between members
- Rights and duties of managers
- Conditions for amending the OA
- Tax designation of the LLC
- Profit and loss sharing
- Dissolution events
- Ownership transfer procedures
If an LLC doesn’t adopt an OA or the OA lacks directions on certain topics, the LLC will default to California law. California is one of the few states that requires LLCs to have an OA. Although you don’t have to file the OA with the Secretary of State, you do need to maintain a copy of it. Don’t know where to start? We offer templates that can help you draft an OA for your California LLC.
There are many benefits to having an OA for your California LLC. For example, an OA gives you control of the LLC. As mentioned earlier, without an OA, your LLC is subject to the default laws of California. These may not be in line with what you or the other members want for the LLC. An OA also avoids potential conflicts between members by clarifying roles and responsibilities and how to handle disputes.
When it comes to transferring LLC ownership in California, first look to the OA for instructions. If there are no provisions or the LLC doesn’t have an OA, you must follow California’s ownership transfer requirements.
There are two common ways to transfer LLC ownership in California. You can either sell the entire LLC to a third party or conduct a partial sale (also known as a buyout).
Partial Transfer in California: The Buyout Provision
A partial transfer is a contractual transaction between LLC members. All LLC members will be named parties under a buy/sell agreement, which is a legal document. The member who wants out of the LLC sells his or her ownership interests to the remaining members who then split that portion amongst themselves.
A well-written and comprehensive OA will have instructions on the buy/sell agreement. If not, look to California law for guidance.
Full Transfer: Selling the California LLC
You also have the option of selling the entire LLC to a new owner. The buyer can choose whether to purchase the entity as a whole or just the assets. All LLC members must consent to the sale of the LLC. Again, look to the LLC’s OA for how to handle this process.
Other Possible Issues
Factors can arise that may complicate matters when you try to transfer LLC ownership in California. Here are some things to keep in mind.
Death of a Member
The death of a member can be quite impactful to an LLC. When a member dies, his or her ownership interest typically transfers to the member’s surviving spouse or children. It’s important to note that the person inheriting the LLC interest only receives the benefits of the interest, such as the percentage of profits. The inheritor doesn’t have a right to a management interest in the LLC. In other words, the heir can get the benefits that the member enjoyed, but they have no control over the management of the business.
Often, the remaining members will buy out the deceased’s interest from the inheriting next of kin.
Dissolution and Reformation in California
There are certain instances where dissolving and creating a new LLC may be the most efficient option. If, for example, more than one LLC member wants to sell an ownership interest, you may consider dissolving the LLC completely and allow the other members to form an entity of their own.
Look to the OA to see what events may trigger a dissolution and how to proceed. Again California law provides default provisions if the LLC doesn’t have an OA.
File proper change of ownership paperwork in California
If you make changes to the ownership structure of your California LLC, you don’t need to notify the state. Keep in mind, however, when transferring ownership interests, your management structure may change. In that case, you need to file an Amendment to Articles of Organization of a Limited Liability Company (LLC) with the California Secretary of State. Our LLC Amendment and Worry-Free Compliances services can take care of this for you.
Making Your LLC Transfer of Ownership Easy
We can’t emphasize enough the importance of a thorough and comprehensive OA for an LLC. An OA is the best way to navigate through transferring ownership interests. If you don’t know where to start with your OA or want to make sure you have all the necessary provisions, check out our LLC OA templates.
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 a California LLC?
Yes. California LLC members can sell their ownership interests through either a partial transfer of just your interest or through a complete sale of the LLC. However, any other members in the LLC must agree to the transfer.
Can a California LLC issue new membership interests?
If all existing LLC members agree, the LLC can issue new membership interests. Remember, when adding new members you’re further dividing the ownership interests and profits. Look first to the LLC’s OA to understand the procedures for adding new membership interests.
How do I change ownership of a California LLC with the IRS?
You don’t need to notify the IRS of any ownership changes within your LLC if it has no effect on the LLC’s tax classification. Only if your tax classification changes or you dissolve the LLC do you need to notify the IRS. If you do need to notify them, you can use Form 8822-B.
Can an LLC member have no ownership interest?
No. LLC members are owners. As described above, some people may inherit or otherwise obtain a financial interest in the company, but that does not give them the same rights as members.