In the life of a limited liability company (LLC), there may come a time when one or more members wants to transfer their ownership interest in the LLC. However, doing so is more difficult than in a corporation. Corporations vest ownership in stocks, which shareholders may freely transfer through buying and selling to other eligible shareholders.
With an LLC, however, ownership vests directly with the LLC’s members. While this allows for more flexibility during the life of the LLC, it’s more restrictive during a transfer of ownership because the LLC’s members can’t freely transfer their interest. For more information on the advantages and disadvantages of forming an LLC, check out our LLC formation page. To take a look at all of our products and services, take a look at our products and services page.
An operating agreement (OA) sets out the rules that govern an LLC’s operation, including the division and transfer of ownership. Some states require filing an OA at the time the business is formed, but this isn’t always the case. Georgia doesn’t require an OA to form an LLC, but having one is a good idea.
If you’re looking to transfer LLC ownership, your operating agreement is the first place to look for instructions on how to sell or transfer a member’s ownership interest. On the other hand, if the LLC doesn’t have an OA, Georgia’s Limited Liability Company Act will provide default provisions.
An operating agreement will offer much more control over how buyout provisions will look, making it a better choice than relying on Georgia’s default rules. ZenBusiness can help you with an operating agreement template to help you get your LLC running the right way.
So what does a transfer of ownership interest look like? There are two accepted methods of transferring an LLC interest without legally dissolving the LLC: a partial sale (called a buyout) or a full entity sale.
The buyout provision is the part of the operating agreement that instructs LLC members when and how to transfer one member’s ownership interest to the others. In simple terms, the buyout allows some members of an LLC to literally “buy out” another member or members. The buying members then split their newly acquired ownership interest equally, and the LLC continues on with fewer members.
If an OA exists, the buyout will occur according to the terms of the OA via a buy-sell agreement. As you might imagine, buyouts can be a source of contention among LLC members. A comprehensive OA is virtually the only way to avoid in-fighting among LLC members and gives everyone an equal opportunity to assert their rights within the LLC.
The main alternative to a buyout is a full sale of the LLC to a third party. In this case, the buyer may be interested in the entire business or just the LLC’s remaining assets.
As with a buyout, a full sale will usually occur according to the OA. What’s more, the OA’s sale provisions generally protect the members’ rights by preventing a sale without the consent of every member.
Keep in mind that the sale of an LLC is a much more complicated process than a buyout; hiring a lawyer is typically a good idea, especially if you want to make sure everything is done correctly.
When an LLC member dies, their interest doesn’t disappear. Instead, it transfers to the member’s surviving family (like their spouse or children), in the form of benefits or a profit share. However, the deceased member’s heirs have no management interest in the LLC. Nevertheless, to avoid complications, buying out the next of kin is usually the most commonly used option.
Rather than deal with a partial buyout or full sale, sometimes the easiest option is simply to start over. Dissolving the LLC allows you to do just that. After dissolution, members who want to start fresh can, while the others can take their investment and be on their way. Dissolution and reformation also allows new members to join more easily.
Whenever you change ownership interests in your Georgia LLC, don’t forget to file the proper notice with the Georgia Secretary of State. Section 14-11-210 of the Georgia Code provides more information about the requirements for filing an amendment to the LLC’s Articles of Organization, such as a change in ownership.
As you can see, transferring an LLC isn’t always the most straightforward process. But having an Operating Agreement in place goes a long way toward making the transition much smoother. If you’re in need of a great OA, don’t miss out on ZenBusiness’s Operating Agreement template.
Yes, with some limitations. Members of an LLC can sell their interest to other members in the LLC or others, but only according to the provisions in the operating agreement or as allowed by Georgia law.
Yes, an LLC can add new members, but only with the consent of the other members.
The IRS doesn’t recognize LLCs as a separate business entity. Instead, the IRS treats businesses as either corporations, partnerships, or sole proprietorships. Businesses with an employer identification number (EIN) will have designated a “responsible party.” The IRS does require notice when this party changes.
No. By definition, an LLC member has an ownership interest in the LLC. If the LLC is manager-managed, a manager can participate in the LLC without having an ownership interest. But members must have an ownership interest to be a “member.”
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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