Although there are many benefits to forming a Connecticut limited liability company (LLC) over a corporation, there are some disadvantages as well. One complication can arise when an LLC owner wants to move on from the business. In fact, the process of transferring ownership interests in a Connecticut LLC is much more complex than transferring ownership in a corporation. This is due to the fact that a corporation’s ownership is vested in stock shares, which are freely transferable. A shareholder simply needs to sell their share, and their ownership interest transfers right along with it.
Conversely, an LLC’s ownership is vested in the individual members themselves and are not freely transferable without the consent of other members of the LLC. Moreover, the lack of required formalities in an LLC, as compared to a corporation, makes the sale and transfer of ownership more difficult. Nevertheless, this doesn’t mean that LLC transfer of ownership is impossible. You just need to know how to do it.
Wondering how to transfer ownership of an LLC in Connecticut? Here are the ways an LLC member can legally transfer their interest in the business and how the process works. For more information about forming an LLC in Connecticut, visit our Connecticut LLC formation page. Looking for something else? Check out our full slate of formation and compliance services to see how we can help you form and grow your business.
First Things First: Connecticut Operating Agreements
As a general matter, the process of transferring ownership in an LLC will most likely be covered in the LLC’s Operating Agreement (OA). An Operating Agreement is a document that provides details on the structure, management, and operations of the LLC and its members. Specifically, Connecticut law provides that the OA for an LLC govern:
- Relations among members
- Relations between the members and the LLC
- Rights and duties of managers of the LLC
- The activities and affairs of the company and the conduct of those activities and affairs
- The means and conditions for amending the OA
The OA may provide for any or the above issues, so long as the provisions aren’t manifestly unreasonable or contrary to the laws of Connecticut.
If your LLC’s OA addresses transfer of LLC ownership, you are bound by those terms. If, however, your LLC doesn’t have an OA, or the OA doesn’t address a procedure for the transfer of ownership, the procedure defaults to applicable Connecticut law.
Although some jurisdictions require an OA at formation of the LLC, Connecticut doesn’t. Nevertheless, having one in place is generally recommended. Having a well-drafted OA gives you the freedom and flexibility to create rules and procedures that work best for the particular needs and goals of your LLC. Don’t have an OA for your LLC? We can help you draft one with our Operating Agreement templates.
Regardless of whether your LLC has an Operating Agreement, there are two generally accepted methods of transferring an LLC ownership interest without legally dissolving the entire LLC entity: (1) the partial sale (buyout), and (2) the full entity sale.
Partial Transfer in Connecticut: The Buyout Provision
One way to transfer ownership in a Connecticut LLC is a partial transfer. Essentially, this is accomplished by all members of the LLC making a deal to “buy out” the member who wishes to leave the LLC. Ownership is then split amongst the remaining members of the LLC. The legal document for a partial transfer is the buy/sell agreement. If your LLC does have an OA, it likely addresses the process and instructions for a partial transfer through a buy/sell agreement.
Even if your LLC doesn’t have such a provision, or doesn’t have an Operating Agreement at all, Connecticut law still permits partial transfer of an ownership interest without the need for dissolving and winding up the LLC. However, the Connecticut default procedures for transfer of ownership interests don’t have a significant amount of definition. This can lead to potential confusion and disputes among members. Thus, the best way to streamline this process is to have a comprehensive and detailed OA in place.
Full Transfer: Selling Your Connecticut LLC
Another option is a full transfer of the entire LLC entity to a third party. Sometimes, a buyer may want to purchase the entire business. In other situations, the buyer may only want to purchase the LLC’s assets. Regardless, the Operating Agreement for your LLC is likely to detail the proper procedure for selling the business.
Importantly, however, a full transfer of the LLC can only be accomplished if all members of the LLC consent to the sale. Even if all consent, a full transfer of an LLC can be complex and time-consuming. If you run into issues, it’s a good idea to consult with an attorney to help ensure that all requirements and regulations are properly followed.
Other Possible Issues
Of course, a partial transfer and full transfer are not the only scenarios that may come up. Below are a few additional situations that may arise involving LLC transfer of ownership in Connecticut.
Death of a Member
If a member dies, that member’s interest in the LLC will generally pass on to their next of kin. But they only inherit the deceased member’s portion of profits and other benefits. A transferee won’t have any right to participate in the management of the LLC. Therefore, in the aftermath of a member’s death, the other members often choose to buy out the transferee’s interest.
In some situations, it is best to fully dissolve the entity. For example, if some members don’t consent to a sale, it might be more trouble than it’s worth to proceed with a partial transfer and buyout of the objecting members. In cases like these, dissolving the LLC in its entirety and forming a new one can be a good option. This allows members the opportunity to take their investment and leave if they want out. It also allows new members to join and old members to continue if they wish.
File proper change of ownership paperwork in Connecticut
No matter what avenue you choose, make sure to keep up to date and file any requisite change of ownership paperwork. The State of Connecticut requires the filing of various documents with the Secretary of State when certain changes are made to your LLC. Thus, any time there is a change in ownership or dissolution of the business, it’s important to file an amendment or certificate of dissolution with the state.
Let ZenBusiness Help You Grow Your Connecticut Business
The transfer of LLC ownership in Connecticut can be a complex process. However, having a comprehensive, detailed, and clearly defined OA can simplify the process and reduce time, stress, and disputes in the future.
If you’re in the process of forming an LLC in Connecticut, don’t forget to have an OA in place. In fact, this is often the key to making potential future transitions as smooth and simple as possible.
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 LLC?
Yes, any member of an LLC has the ability to sell their interest in the business. However, the specific procedure for doing so will depend on whether your LLC has an Operating Agreement and the specific procedures contained therein. If no OA is in place, you must get consent from all other members before transferring your LLC interest.
- Can an LLC issue new membership interests?
Yes, an LLC can issue new membership interests in the company if all members of the LLC agree to do so. However, if all members can’t agree, dissolution of the entire LLC and formation of a new entity may be the best option moving forward.
- How do I change ownership of an LLC with the IRS?
While changes in ownership of an LLC must be reported to the Connecticut Secretary of State, such changes don’t actually need to be reported to the IRS. The only times you may need to report a change to the IRS is if you’re changing the tax classification of the LLC or if you have dissolved the LLC entirely and started a new one.
- Can an LLC member have no ownership interest?
No, there is no scenario in which an LLC member can have no ownership interest. But it is possible for people to have only a financial interest in an LLC without being a member. And members of the LLC may employ people to manage the business who have no ownership interest in the LLC.