There are plenty of reasons to transfer limited liability company (LLC) ownership in Illinois. Regardless of your reason for departure, there are a lot of things to consider when handling this type of business action. You’re essentially shaking up the foundation of the company.
Transferring ownership interest in an LLC is more complicated than it is for a corporation. Corporations operate through shareholders rather than members. Shareholders own stock, which can be bought or sold with minimal limitations. LLC ownership is vested in the members of the LLC and their rights. These rights are decided on by founding members, determined at the time of formation.
How to Transfer Ownership of an LLC in Illinois
An LLC is initially formed by Articles of Organization, which are filed with the Illinois Secretary of State. As you move through the process to transfer LLC ownership in Illinois, you will need to inform the Secretary of State about any changes to the ownership of the organization. In Illinois, you don’t need to file an amendment to your Articles of Organization at the time of transfer. Instead, transfers are listed on your annual report.
If you’re going through the formation process, or have concerns about compliance, you may want to review the our LLC formation services to get expert advice and peace of mind.
First Things First: Illinois Operating Agreements
Creating an operating agreement (OA) is one of the first steps to forming your LLC. This document defines the intricacies of how your company will be run, such as:
- Management structure
- Membership roles
- Percentage of ownership
- Distribution of profits
- How conflicts of interest will be handled
- Decision making
- Day-to-day operations
- How ownership transfers will occur
These provisions serve to simplify the process and define how to transfer ownership of an LLC in Illinois for your specific company. We provide an operating agreement template that can help you draft an effective operating agreement that meets your business’s needs.
If your operating agreement doesn’t have provisions that address buying and selling ownership, check your Articles of Organization. If there are no provisions there either, you will need to use the law stated in the Illinois Limited Liability Companies Act (ILCS). Under Illinois law, a member’s ownership interest is considered personal property that may be transferred in whole or in part. However, unless an operating agreement says otherwise or all the members consent to a transferee becoming a member, a member can transfer only their distributional interest — their right to receive distributions from the LLC — not their membership interest.
LLC Transfer of Ownership Types in Illinois
There are two ways to transfer LLC ownership in Illinois. If you aren’t selling the entire business and you don’t have 100% ownership of the business, you may transfer a partial interest. If you’re selling your LLC, you will transfer ownership of your entire business to a new owner. Your operating agreement needs to detail provisions for both partial and full transfers. Having a comprehensive LLC operating agreement can play a big role in protecting membership rights and avoiding disputes.
Partial Transfer in Illinois: The Buyout Provision
Your operating agreement may have a provision permitting remaining members to buy out a departing member’s interest in the LLC. This allows the LLC to have the same amount of financial contributions that it would have had with the transferring member. A partial transfer can also occur when the departing member transfers their interest to someone else. However, as noted above, membership rights don’t automatically transfer when a member transfers their interest.
Full Transfer: Selling Your Illinois LLC
Another option when one or more members want out of the LLC is to sell the company altogether. It’s important to have everything in writing (buy/sell agreement), so all parties are clear on what is being purchased. Some buyers may want the entire business, and others may just want to purchase the business assets. The buy/sell agreement will also need to state the consent of all members of the LLC prior to sale.
Other Possible Issues
There are other things to consider if you’re looking to transfer ownership interest in your Illinois LLC. Just a few are:
Death of a Member
You may not be seeking to transfer LLC ownership in Illinois by choice. But when the death of a member occurs, their interest and obligations don’t dissolve. Their distributional interest will pass to their heirs, such as a spouse or children, but their membership rights won’t. Existing members will often choose to buy out the interests of the heirs.
Transferring partial LLC membership interest can be difficult. Depending on the size and scope of your Illinois LLC, it may be easier to dissolve the existing LLC and form a new one. The decision to dissolve may depend on a lot of factors such as the financial health of the business and desires of the members. All members must approve the dissolution unless the OA provides otherwise.
File proper change of ownership paperwork in Illinois
If you sell your entire LLC, paperwork must be filed with the Secretary of State using form CBS-1 within 10 days of the sale. Partial ownership transfers will be recorded on the LLC’s next annual report.
Keys to Transfer LLC Ownership in Illinois
The easiest way to simplify the ownership transfer process in Illinois is to have provisions governing the process already stated in your OA. Using ZenBusiness’s operating agreement template can help you include all pertinent details to avoid confusion. The best offense is a good defense, and in this case, a good defense is a comprehensive operating agreement.
If you do find yourself in a dispute with other members or a purchaser, you may want to seek legal counsel from an experienced business attorney.
- Can I sell my interest in an LLC?
You can sell your interest in an LLC. Depending on the structure of your LLC and your intention, this may be a full or partial transfer. Follow your business operating agreement provisions for details on how to sell your interest.
- Can an LLC issue new membership interests?
Adding new members to an LLC may dilute the ownership interests of current members. However, there are many situations where adding members would have a positive impact. New members must be agreed upon by all current members.
- How do I change ownership of an LLC with the IRS?
If you have changed ownership of your LLC, it’s important to notify the IRS. You may need to file one or more different forms depending on the specific changes made and how your LLC is taxed.