If you’re considering transferring your limited liability company (LLC) ownership interest, there are several things to take into consideration. Transferring ownership in an LLC is more difficult than transferring stock in a corporation. Corporations have shareholders instead of members. Shares can be bought and sold with minimal limitations. LLCs have owners with vested interest and rights. Transferring shares can have a great impact on the profitability and management of an LLC. If you’re just starting out in the formation process, we can help you set up your Hawaii LLC correctly to minimize any confusion when ownership is in question.
First Things First: HawaiiOperating Agreements (OA)
Transfer of LLC ownership in Hawaii is easiest when you have a comprehensive operating agreement. This is a legal document created to define and detail standard operating procedures and policies for your LLC.
You will typically want to draft your LLC’s operating agreement shortly after formation, but if you don’t have one currently, you may want to consider creating one as soon as possible. Our operating agreement template can help you draft a binding document that will allow you to govern your company as intended. Some matters to address in an operating agreement include:
- Percent ownership of the members
- Profit and loss distribution
- Decision-making protocol
- Member roles and responsibilities
- Day-to-day management structure
- How to handle conflict between members
- Provisions for ownership transfers
- Guidelines for a buy/sell agreement or dissolution of the LLC
If you don’t have an existing OA, transferring LLC ownership in Hawaii will require you to follow state laws.
Hawaii LLC Ownership Transfer Laws
According to Hawaii law, transferring an interest in an LLC generally gives the transferee only a distributional interest in the LLC, not a membership interest. A distributional interest gives someone the right to receive distributions and profits. However, they don’t have the full rights of a member, such as the right to participate in decisions relating to the business or inspect the company’s records.
In the absence of an operating agreement that outlines other rules, a membership interest can be transferred only with the consent of all the LLC’s members. A certificate of interest must be provided at the time of the transfer.
When you seek to transfer LLC ownership in Hawaii, it’s important to note that the state statute isn’t as detailed as those of many other states. That’s one more reason it’s preferable that you have an operating agreement that conveys guidelines for ownership transfers.
Types of LLC Ownership Transfers in Hawaii
There are two types of LLC ownership transfers that can take place, depending on the objectives of the transferring member or the entire membership.
A partial transfer occurs when one or more members transfer their ownership interest to someone else but other members retain their interest. Unless the operating agreement provides otherwise, this person will only receive the distributional interests and not the management interests. Nevertheless, the other members may choose to grant management rights to the new member if they choose to.
Another option is for the current members to buy out the ownership interest from the person wanting to leave the LLC. This generally changes the ownership percentages for each member.
A full transfer of ownership means that the LLC is sold to a third-party buyer. This buyer may purchase the entire LLC or just the assets, depending on their needs. This is a big deal and typically requires consent of all the members. When an LLC is purchased, there needs to be a buy/sell agreement stating all stipulations of the transfer and asserting consent from all LLC members. Because there are a lot of details involved, you may want to bring in an attorney to help with this process.
Other Possible Issues with Hawaii LLC Ownership Transfers
There is a lot that goes into transferring LLC ownership in Hawaii. This can be even more difficult if the state rules are unclear or undesirable for your specific company. You can’t control everything, but there are a number of contingencies that you can address beforehand in your operating agreement. Here are a few things you may want to consider.
Death of a Member
If a member of the LLC dies, their distributional interest will be passed to their spouse, children, or next of kin. Management rights and responsibilities aren’t included. In many situations, the remaining members will buy out the ownership interest from the deceased’s heirs.
Partial transfers can get complicated. Depending on the size and scope of your LLC, along with the financial health and goals of the members, it may be easier to dissolve the current LLC and form a new one. This may provide a chance for the business to restructure and come back stronger. Dissolution requires full consent of all members. You will need to conduct all necessary “winding up” tasks such as settling accounts and distributing profits.
File Proper Change of Ownership Paperwork in Hawaii
If you have a partial transfer of LLC ownership in Hawaii, you don’t need to file a separate document with the state. You will need to update the information with the new member on the next Hawaii annual report. You can make the annual report process easier by using the ZenBusiness annual report services.
If your LLC chooses to dissolve the business you must file Articles of Dissolution with the State of Hawaii. If you don’t officially dissolve the LLC, you will still be responsible for any recurring fees and penalties.
Keys to Transfer LLC Ownership in Hawaii
Transferring LLC ownership in Hawaii can be a complicated process. The process will be much clearer if you have a comprehensive operating agreement with provisions addressing transfers, buy/sell agreements, and dissolutions. If you don’t have a detailed OA in place, you may want to look into the our operating agreement template to guide you as you craft an OA that suits the needs of your business.
If you’re currently trying to transfer LLC ownership in Hawaii and find yourself in a dispute with other members or potential buyers, you may want to consider seeking professional legal counsel to avoid further complications.
- Can I sell my interest in an LLC?
You can sell your distributional interest in a Hawaii LLC. But management rights don’t automatically transfer with the interest. Your operating agreement may detail specifics on how to transfer LLC ownership in Hawaii. If an operating agreement doesn’t exist or lacks that provision, you will need to follow state regulations.
- Can an LLC issue new membership interests?
Issuing new membership interests is possible but will dilute the membership interest of existing members. Unless your operating agreement says otherwise, existing members must all agree before you can admit new members.
- How do I change ownership of an LLC with the IRS?
You will need to notify the IRS of full transfer ownership changes to your Hawaii LLC using Form 8822-B.
- Can an LLC member have no ownership interest?
The rules of membership rights and interest are governed by the LLC operating agreement, if there is one. In Hawaii, an individual can hold a distributional interest without being a member or having any management rights.