In most situations, limited liability companies (LLCs) offer much greater flexibility than corporations. When it comes to transferring ownership, however, the process for LLCs is more difficult.
This is because LLC ownership interest is vested directly in the LLC’s members. By contrast, corporations vest ownership in stocks, which can be freely bought and sold by the corporation’s shareholders. If you want to learn more about forming an LLC in Florida, visit our LLC formation page.
An operating agreement (OA) is a legal document that provides the rules by which an LLC operates. These agreements cover things like the LLC’s day-to-day operations, including procedures for the transfer of ownership. Florida, like many other states, doesn’t require an operating agreement to form an LLC. However, having one is generally a good idea.
When an LLC has an OA, it will typically provide the controlling method and instructions on how to sell or transfer a member’s ownership interest. When an LLC doesn’t have an OA, Florida law provides some default rules to keep things going.
Of course, with an operating agreement you have the opportunity to draft these rules the way that you want. This is typically a better choice than relying on Florida’s default rules. If you need help putting together an operating agreement, you can start with our operating agreement template.
Whether or not the LLC has an OA, there are two main ways to transfer an LLC ownership interest without completely dissolving the LLC: via buyout or a complete sale of the entity.
The buyout provision is the part of the OA that provides clear instructions for how and when an LLC’s members can buy and sell their ownership interests. It may also outline triggering events that may require members to purchase the ownership interest of another member (or members) or give them the option to do so — for example, upon the death, divorce, bankruptcy, or departure of a member.
Typically, the members would divide the departing member’s interest among themselves, and the LLC would then continue with the reduced number of members. As you can probably guess, the buyout will happen according to the rules set out in the OA. Additionally, buyouts typically involve a separate contract, called a buy/sell agreement.
If there is no operating agreement in place, Florida law states that all members must expressly agree to the buyout and withdrawal of the departing member. Having a comprehensive OA and a solid buy/sell agreement can help avoid the trouble that sometimes arises when a buyout becomes necessary.
Buyouts are appropriate when some members of the LLC want to remain in the business and others don’t. If all the members would rather sell their ownership interest, another option is to execute a full sale of the LLC to a new owner.
Of course, the sale of an LLC is far more complicated than a buyout. If you’re ready to hand your LLC over to a new owner, consider hiring a lawyer familiar with contracts and business sales to make sure everything goes smoothly.
When a member of an LLC dies, their interest in the LLC will transfer to their heirs. But don’t worry; the surviving family of the deceased member won’t suddenly have the ability to exercise control over the LLC. Rather, the deceased member’s transferrable interest is limited to granting the heirs the right to a percentage of the LLC’s profits.
One option for the surviving members of the LLC is to buy out the deceased member’s heirs. This is typically the best option, as it allows the remaining members in the LLC to move forward while minimizing additional complications.
Dissolution is the process of “undoing” the formation of an LLC. If several of the LLC’s members want to give up their ownership interest at the same time, dissolving the LLC and starting a new one may be a good option. After dissolution, the members who want to reform the LLC can, while the others can take their investment and walk away from the venture. Dissolution and reformation also allows new members to join and replace the old members if they want.
Whenever you change ownership in your LLC, don’t forget to file the proper documentation with the Florida Division of Corporations. For more information on managing or changing an existing business entity, you can visit the Florida Department of State website at sunbiz.org.
As you’ve seen, the transfer of a member’s ownership interest in an LLC isn’t as easy as it might seem. While an operating agreement won’t guarantee that your LLC will be free of these troubles, it can be a major benefit. If you’re looking for more support forming or running your Florida LLC, check out our formation and compliance services to see where we can help you make your business thrive.
Yes, as long as the transfer follows the operating agreement. Or if there is no operating agreement, your transfer will need to follow applicable Florida laws.
Yes. New members can join an LLC as long as the other members consent.
The IRS doesn’t separately recognize LLCs as a business entity. As a result, there is no need to report all ownership changes of your LLC with the IRS. However, if you’ve obtained an employer identification number (EIN), there will be a “responsible party” on file with the IRS. If this party changes, business owners must report the change using Form 8822-B. For more information on this form, visit irs.gov.
No. A member is someone with an ownership interest in the LLC, even if they don’t actively manage the LLC. If the person doesn’t have an ownership interest, they can’t be a member. However, in manager-managed LLCs, managers can still participate in the day-to-day operation of the LLC without having an ownership interest. Additionally, transferees such as heirs may receive an interest in distributions from the LLC without acquiring an ownership interest.
Disclaimer: The content on this page is for information 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.
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