There are a number of advantages that come along with forming a Colorado limited liability company (LLC). However, transferring an ownership interest in an LLC can be more difficult than with a corporation.
Whereas a corporation’s ownership is vested in freely transferable shares of stock, this isn’t the case with LLCs. Rather, in an LLC, ownership is vested in individual members, and such ownership isn’t freely transferable without the consent of the other individual members of the LLC. This, coupled with the lack of formalities required in an LLC, can make the transfer of ownership much more complex than is the case for Colorado corporations.
This guide will discuss the ways in which LLC members in Colorado can legally transfer their interest in the business. For more information about how to form an LLC in Colorado, visit our Colorado LLC formation page, and take a closer look at our full slate of formation and compliance services to see how we can support your business needs.
First Things First: Colorado Operating Agreements
In most cases, the transfer of ownership in an LLC will be governed by an LLC’s Operating Agreement (OA). This Operating Agreement is a legal document that specifies certain details regarding the affairs of the LLC and the conduct of its business and members. So long as the OA doesn’t contradict the laws of the State of Colorado, a Colorado LLC and its members will be bound by the terms of its Operating Agreement.
Again, most Operating Agreements will have provisions governing the transfer of ownership in the LLC. If your LLC’s Operating Agreement addresses how to transfer LLC ownership, follow the procedures for transfer or sale as detailed in the OA. However, if your LLC doesn’t have an Operating Agreement, the process of transferring LLC ownership will be governed by the default procedures under Colorado law.
Colorado doesn’t require LLCs to have an Operating Agreement. Additionally, if an LLC does have an Operating Agreement, Colorado doesn’t require the OA to be in writing. However, having a written Operating Agreement is strongly recommended. This will allow you to clearly delineate procedures and requirements for the governance of your LLC. Further, having this in writing can help prevent confusion and disputes in the future.
Don’t know where to begin? Use our Operating Agreement template to help you draft an Operating Agreement for your Colorado LLC today.
Once you’ve determined what rules govern the transfer of LLC ownership for your Colorado LLC, you’re ready to move forward. Below are overviews of a few different scenarios where you might need to transfer LLC ownership.
Partial Transfer in Colorado: The Buyout Provision
Sometimes, one or more individual members of the LLC may want to leave the business, but it may not make sense to dissolve and wind up the entire entity. In these types of scenarios, a partial transfer, or “buyout,” can be a great option.
In a buyout, the LLC members who wish to continue their ownership in the LLC will enter into a deal to buy out the interests of the member or members who want out of the business. The remaining members then split ownership amongst themselves. A partial transfer requires a legal agreement, typically called a “Buy/Sell Agreement,” which specifies the terms and conditions of the deal.
The Operating Agreement for your LLC usually contains more detailed information regarding the procedures for implementing partial transfers of ownership. If your OA doesn’t address buyouts, this can lead to potential confusion and disputes later on. Thus, this is just another reason it’s so important to have a comprehensive and detailed Operating Agreement for your Colorado LLC.
Full Transfer: Selling the Colorado LLC
In other cases, you may desire a full transfer or sale of the LLC entity to a third party. This might consist of a buyer purchasing the assets of the LLC or potentially the entire business.
As is the case with a partial transfer, the procedures for a full transfer of ownership will most likely be governed by the LLC’s Operating Agreement. However, selling an LLC can only be accomplished if all members of the LLC agree to the sale. If any members don’t agree, a partial buyout or dissolution of the LLC might be necessary.
If all members do consent to the sale of the LLC, it is a good idea to hire an attorney before moving forward with the next steps. No matter how detailed your LLC’s OA is, the fact remains that selling an LLC is a complicated process.
Other Possible Issues
Sometimes, neither a partial transfer nor full transfer will work for your LLC’s particular circumstances. Here are a few other issues that commonly arise regarding the transfer of LLC ownership in Colorado.
Death of a Member
When an LLC member passes away, it’s important to know what happens to their ownership interest. Generally, a deceased LLC member’s interest will pass on to their surviving next of kin or the beneficiaries named in their will or other estate planning document. However, the transferee of the deceased member’s interest is only entitled to receive their share of profits, compensation, or other benefits. Specifically, the transferee doesn’t have any right to participate in the management or activities of the LLC unless and until that transferee becomes a member of the LLC. However, this can’t happen without the consent of all other members of the LLC.
Frequently, after the death of an LLC member, the remaining members of the LLC elect to buy out the transferee’s interest through a buy/sell agreement.
There are some situations where it might be best to dissolve the LLC as a whole. Sometimes, you may want to add multiple new members to the LLC or change the structure and management of the business. In other cases, all members will simply wish to part ways and dissolve the LLC.
While you might be able to accomplish your LLC’s goals with multiple partial transfers or various amendments to the governing documents, dissolution of the existing entity and formation of a new LLC might be your best option.
File the proper change of ownership paperwork in Colorado
Lastly, don’t forget to file the proper change of ownership paperwork with the state. No matter what process you go through to transfer LLC ownership, it’s important to promptly and properly notify the Colorado Secretary of State of any changes.
Let ZenBusiness give you a solid start on your Colorado LLC Operating Agreement
The transfer of LLC ownership in Colorado can be a complicated legal process, especially if you don’t have an Operating Agreement in place. While an OA isn’t required, having one for your Colorado LLC is one of the best things you can do to prevent disputes and improve efficiency for your business processes moving forward.
Need an Operating Agreement for your Colorado LLC and don’t know where to begin? Use our Operating Agreement template to help you get started, or take a look at all of our tools and services to see if one is right for you.
Disclaimer: The content on this page is for informational purposes only, and doesn’t 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 LLC?
Yes, as a member of an LLC, you may sell your individual interest in the business. The specific procedures for doing so will most likely be governed by the LLC’s Operating Agreement. If not, all members must agree to the sale or transfer.
Can an LLC issue new membership interests?
Yes, an LLC may issue new membership interests in the company. However, this can only be accomplished if all members of the LLC agree to do so unanimously.
How do I change ownership of an LLC with the IRS?
Typically, you won’t have to report changes to your LLC to the IRS. However, if you’ve dissolved the LLC or changed tax classifications, the IRS will want a report detailing those changes. Additionally, if the responsible party for your LLC has changed, you will need to file a form 8822-B notifying the IRS.
Can an LLC member have no ownership interest?
No, all members of an LLC will have an ownership interest in the business, even if they don’t participate in the management of the entity. However, a person may have a financial interest in an LLC without being a member.