If you’re thinking of transferring your Iowa LLC ownership interest, there are several considerations to keep in mind. Transferring LLC ownership in Iowa isn’t as straightforward as you might expect.
For example, corporate owners, also known as shareholders, have their ownership interests vested in stocks. Stocks can easily be bought and sold. LLC owners (or members), on the other hand, need the consent of all other LLC members to transfer their ownership interest.
Corporations also require certain formalities when it comes to buying and selling stocks, whereas LLCs don’t have these rules in place, making the transfer that much more complex.
To learn more about forming an Iowa LLC, check out our Iowa LLC formation services.
First Things First: Iowa Operating Agreements
An operating agreement (OA) is a legal document that outlines the ownership structure and operational procedures of an LLC. All LLC members are bound by the OA. Iowa doesn’t require LLCs to have an OA, but having one is incredibly helpful to the success of your business.
Whether you’re the sole member of an LLC or there are multiple members, it’s a good idea to adopt an operating agreement. With an OA, you get to make certain decisions about the LLC before any issues arise. For example, a comprehensive OA will include information such as how the LLC will be managed, distributions of profits and losses, conflict resolution procedures, tax classification, and the effects of changes to ownership and management structure.
If you’re worried about drafting an OA on your own, we can help. We can provide you with an operating agreement template so that you can further customize your Iowa LLC.
Transferring Ownership of an Iowa LLC
When trying to understand how to transfer ownership of an LLC in Iowa, first look to the OA for instructions. If the LLC doesn’t have an OA or there is nothing in the document about ownership transfers, your default is Iowa law.
The two methods of transferring LLC ownership interests are a partial transfer and a full transfer
Partial Transfer in Iowa: The Buyout Provision
If just one member wants to sell his or her LLC ownership interest, a partial transfer may be the best option. With this type of transfer, the member enters into a buy/sell agreement with the other members and sells his or her interest to them. The transferred interest is then divided between the remaining LLC members.
When it comes to structuring the buy/sell agreement, look to the LLC’s OA. A well-drafted OA will have instructions for the buy/sell agreement. This will hopefully avoid any disputes between the LLC members if the terms have been set in the OA.
Full Transfer: Selling Your Iowa LLC
Selling your Iowa LLC to a third party may be a good option if multiple members want to get out. Like with a partial sale, you need a buy/sell agreement with the purchaser. This legal document will set out the details of the transaction, including whether it’s a purchase of the whole LLC or just the assets. Again, consult the LLC’s OA to learn about the terms of selling the LLC.
The sale of an entire LLC can have significant financial, legal, and tax ramifications, so it’s wise to hire a business attorney to walk you through the process.
Other Possible Issues
There are a few unexpected scenarios that may lead to an LLC ownership transfer.
Death of a member
A member’s death changes the ownership interests of an LLC. Typically, the deceased’s interest goes to his or her next of kin, which is usually a spouse or child. However, all the person inherits is a beneficial interest in the LLC, such as a right to LLC profits, but no management interest.
Often the best option in this scenario is for the remaining LLC members to purchase the inheritor’s interest through a partial transfer.
Dissolution and reformation
If multiple LLC members want to sell their membership interests, it may be easier to dissolve the LLC entirely and start a new one. This way, those members who want to leave can take their investment and new members can have the opportunity to join.
Do you need to file a change of ownership paperwork?
Iowa doesn’t require you to amend your formation documents if the LLC ownership interests change.
If your Iowa LLC has an OA, transferring ownership interests may be a smooth process. Otherwise, this could be the time to recruit some legal help from an experienced business attorney.
If you’re just starting an Iowa LLC, we offer both LLC formation services and OA templates. Let us know how we can help you succeed.
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.
- Can I sell my interest in an Iowa LLC?
Yes. Any Iowa LLC member can sell their ownership interest, as long as the other members consent. The OA will likely have instructions on how to conduct the sale.
- Can an Iowa LLC issue new membership interests?
As long as the LLC’s OA authorizes it, the LLC can issue new membership interests. Look to the OA to know what the requirements are for becoming a member.
- How do I change ownership of an Iowa LLC with the IRS?
It’s not necessary to alert the IRS of any LLC ownership changes. There are two instances where you need to notify the IRS of a change within your LLC.
First, if you decide to change the tax classification of the LLC, the IRS must know. Your LLC may be taxed as either a corporation, sole proprietorship, or a partnership. Since LLCs don’t have their own tax classification, you must choose from one of the three. By default, an LLC is taxed like a partnership where profits and losses are reported on the individual LLC member’s tax returns. Submit an IRS Form 8832 (Entity Classification Election) to make a change.
Second, if you dissolve the LLC entirely then the IRS must be updated. How you classify your LLC for tax purposes will determine which IRS form to use.
- Can an Iowa LLC member have no ownership interest?
An ownership interest is held only by members of the LLC. Members have the right to participate in decisions relating to the LLC. However, if the terms of the OA allow it, those who are not members of the LLC may receive a transferable interest in the company by transfer or inheritance. A transferable interest is the right to receive distributions from the LLC. One can have a transferable interest without being a member and can be a member without having a transferable interest.
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