If you’ve decided to transfer a portion or all of your limited liability company (LLC) membership interest in the District of Columbia, it’s critical that you do it correctly. LLC ownership transfers are different from transferring ownership of a corporation and often more complicated for the following reasons:
- Owners of a corporation, referred to as shareholders, have stocks to signify their ownership. The stocks can be bought and sold freely.
- Owners of an LLC, referred to as members, hold membership interests in the LLC. Membership interests can be transferred subject to the terms of an LLC’s operating agreement or with the consent of all the members.
- LLCs aren’t bound by strict corporate formalities, which can make transferring membership interests more complicated.
At ZenBusiness, we’ve prepared a guide outlining the different procedures for transferring membership interests in a Washington D.C. LLC. For more information about LLC formation in the District of Columbia, see our Washington D.C. LLC formation page.
First Things First: District of Columbia Operating Agreements
The operating agreement (OA) for your Washington D.C. LLC functions as a guide for how your business will operate. The OA includes important information about your LLC, including:
- Liability protection for the LLC members
- The management structure of the business
- Dispute resolution procedures
- Buy-sell provisions if a member seeks to sell their membership, becomes incapacitated, or dies
- Allocation of profits and losses
- Meeting and voting rules
Washington D.C. doesn’t require LLCs to have an operating agreement. However, it’s still a good idea to adopt one because it allows you to lay out the rules that govern your LLC and avoid resorting to the default laws of Washington D.C. Additionally, banks and other institutions may require proof of your OA before agreeing to work with your LLC. Including a buyout provision in your LLC’s operating agreement provides the guidance necessary when you need to transfer an ownership interest in your LLC.
Making sure to address all essential issues in your OA can be overwhelming. At ZenBusiness, we provide an operating agreement template to streamline this process and help you create the right OA for your business.
How to Transfer Ownership of a District of Columbia LLC
There are two ways to transfer ownership of an LLC without dissolving the business entirely. A partial sale, referred to as a buyout, or a sale of your entire LLC.
Partial Transfer in the District of Columbia: The Buyout Provision
A buyout provision of an operating agreement is used when a member of your LLC wants to leave. When an LLC member wants to leave, the existing LLC members can buy out that member’s ownership interest in the LLC. The ownership interest is then divided between the remaining LLC members.
To complete the buyout, the departing member enters a buy-sell agreement with the LLC for their membership interest. The OA should include detailed provisions on forming a buy-sell agreement. Having a detailed and comprehensive OA to guide you through the steps of a membership interest transfer is the best way to avoid disputes and in-fighting among the remaining LLC members. An OA also gives all members an equal opportunity to assert their rights within the LLC as a whole.
To sell your interest to a third party, you will need approval from all other members of the LLC before the third party can become an LLC member with full rights.
Full Transfer: Selling Your District of Columbia LLC
Alternatively, you and the other LLC members might want to sell your entire business to another party. Determine whether the buyer wants to buy the whole LLC or just the assets of the business. Also, it’s very helpful for the process of selling your LLC to be thoroughly documented in your OA. Your OA could require consent from every LLC member prior to authorizing the sale of the whole company. If that’s the case, you have to obtain approval from each LLC member to sell the business.
After you’ve consulted your OA and followed its procedure for transferring the LLC to a third party, you can draft a buy-sell agreement with the purchaser. The buy-sell agreement includes information about the sale. But keep in mind that selling an entire LLC can be a complicated process for business owners. So it is a good idea to consult with a Washington D.C. business attorney to ensure the transaction complies with state and federal law.
Other Possible Issues
Many issues can arise that force the transfer of ownership in your LLC. Many of these circumstances can be addressed beforehand in your operating agreement.
Death of a Member
If an LLC member dies, their interest in the LLC passes to their surviving spouse or heirs, depending on the member’s estate plan and intestacy rules. However, the individual who receives the interest, known as the transferee, doesn’t have the same rights as the deceased member had. The transferee is entitled to receive the deceased member’s percentage of profits from the LLC and other LLC benefits, but they aren’t entitled to participate in the management of the LLC. Remaining members often use a buyout provision in these circumstances.
Depending on how many LLC members want to leave the business, and whether there are other individuals seeking to join as LLC members, it might be easier to dissolve and reform your LLC than go through the hassle of transferring ownership interests. When you dissolve your LLC, the former members receive the value of their ownership interest. You can then reform an LLC with new LLC members, allowing other individuals to join if desired.
Filing change of ownership paperwork with the District of Columbia
LLC Articles of Organization in Washington D.C. require you to include the names and addresses of each LLC member in the document. When an LLC member leaves the business, the change is reflected by filing a Certificate of Amendment with the Department of Consumer and Regulatory Affairs.
Use ZenBusiness tools to help prepare your District of Columbia LLC for the future
LLC ownership interest transfers can seem complex and troublesome, but a well-drafted operating agreement can make the process straightforward and easy. If you’re forming an LLC, need a new operating agreement, or are looking for help with legal compliance, ZenBusiness is here to help. Take a look at our full slate of products and services to see how we can help you best.
- Can I sell my interest in an LLC?
Yes. The terms of an LLC’s operating agreement should describe the process for members seeking to sell their membership interests, and when no OA is in place, you can follow the default Washington D.C. laws pertaining to LLCs.
- Can an LLC issue new membership interests?
Subject to the terms of its operating agreement, an LLC can issue new membership interests with the consent of all members of the LLC.
- How do I change ownership of an LLC with the IRS?
The IRS does not recognize LLCs as a form of business entity. Instead, it requires LLCs to be classified as either corporations, partnerships, or sole proprietorships.
If you sell your entire LLC, file a Form 882-B, Change of Address or Responsible Party — Business, with the IRS within 60 days of the sale.
- Can an LLC member have no ownership interest?
No. Part of being an LLC member is having an ownership interest in the LLC, even if the member doesn’t participate in the management or operations of the business. However, LLC members can hire officers who don’t have an ownership interest to manage the day-to-day affairs of the LLC.
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.