A limited liability company (LLC) is a unique business structure that offers many advantages for business owners. If you have an interest in an LLC, there will probably come a time when you need to sell or transfer your LLC ownership in Kentucky.
However, transferring ownership interest in an LLC is more difficult than transferring ownership in a corporation. This is because a corporation’s ownership is vested in shares of stock. Stock shares are freely transferable. All you need to do to adjust your ownership in a corporation is buy or sell stock as you like.
By contrast, an LLC’s ownership is vested in the members of the LLC. Their rights aren’t freely transferable unless the other members of the LLC agree. In addition, the LLC’s lack of required formalities makes an LLC transfer or sale of ownership harder. So if you’re considering whether you want to form an LLC in Kentucky, this is an aspect of business formation you will want to think about. This handy guide will discuss how to transfer ownership of an LLC in Kentucky as well as the effects of LLC ownership transfers.
First Things First: Kentucky Operating Agreements
An LLC’s Operating Agreement (OA) is an important document for any Kentucky LLC. Essentially, this is a document that outlines the process for making financial and practical decisions. This includes matters like the LLC’s ownership structure, management and operating procedures, and how the business will make daily decisions. Although some jurisdictions require LLCs to have an OA when they initially form, Kentucky does not. However, it’s still a good idea for the owner (or owners) of the LLC to draft an OA.
If your LLC has an OA, then all you need to do to transfer your LLC ownership in Kentucky is to follow the transfer and sale provisions detailed in that OA. If your LLC doesn’t have an OA, then you’re required to follow the default process outlined by Kentucky state law. The simple truth is that it’s in your best interests to create an OA even if it’s optional. This can be difficult, but the good news is that we offer a Kentucky Operating Agreement template that can help you draft your own OA.
How to Transfer Your Kentucky LLC
In Kentucky, there are only two accepted methods for transferring your LLC interest without legally dissolving the business. The first is a partial sale or buyout. The second is a full transfer.
Partial Transfer in Kentucky: The Buyout Provision
A partial transfer happens when a departing LLC member sells their interest or agrees to have their interest bought by several other LLC members. In a buyout, the purchasing LLC members then split the departing LLC member’s ownership interest among themselves.
To accomplish a partial transfer, the LLC members need to have a buy/sell agreement. A buy/sell agreement is simply a contract between several LLC members that formalizes the sale of one member’s interest to the other members. Ideally, the LLC’s OA will have detailed instructions on the provisions of a buy/sell agreement. Even if the LLC doesn’t have an OA on the books, most states — including Kentucky — will allow the LLC to draft a stand-alone buy/sell agreement.
That said, the best way to ensure a smooth ownership transfer is to draft a comprehensive and detailed OA. This allows everyone to rely on a pre-existing, equitable, and agreed-upon process. In turn, this will help reduce the risk of in-fighting among the LLC members.
Full Transfer: Selling Your Kentucky LLC
A full transfer occurs when the members of an LLC decide to sell the entire business to a third party. Depending on the situation, the LLC buyer may want to continue the operations of the business or merely acquire the LLC’s assets. As with partial transfers, it’s very helpful to have a pre-existing OA that comprehensively lays out the full transfer process.
Unlike with a partial transfer, all LLC members must typically agree to a full transfer because they’re selling the entire LLC to a third party. Selling an LLC is much more complex than a partial transfer. For that reason, you may want to consider consulting a lawyer to make sure that the transfer is in compliance with Kentucky state law.
Other Possible Issues
There are several other possible situations that can come up that relate to how to transfer ownership of an LLC in Kentucky.
Death of a Member
In most cases, if an LLC member dies, their interest passes on to their spouse or children.
However, recipients of the interest retain only certain aspects of it, like the right to receive a percentage of the LLC’s profits. The inheritors don’t receive the right to assert the former member’s management interest in the LLC. Because of that legal nuance, the best course of action is often to buy out the deceased member’s LLC interest from the next of kin.
Dissolution and Reformation
A partial transfer can become overly complicated and stressful, especially when multiple members want to leave at the same time or if there isn’t an OA. When this happens, it may be better for the LLC members to simply dissolve the entire LLC. Then the remaining members can immediately reform a new LLC. This measure, while drastic, allows any and all members who want out of the LLC to leave. Also, dissolving and reforming the LLC allows news members to join the venture with few complications.
File proper change of ownership paperwork in Kentucky
Although Kentucky is more relaxed than other jurisdictions when it comes to LLC requirements, you’re still required to file the proper notice with the Commonwealth’s Department of Revenue or Secretary of State.
Use ZenBusiness’s tools to set up your Kentucky LLC for success
Although LLCs offer many benefits, an LLC transfer of ownership isn’t really straightforward. The best step you can take to save yourself from dealing with future headaches is to have a comprehensive operating agreement — and we can help with that! We also offer many different tools and services to help you pursue your dreams and take some of the stress off your shoulders.
Disclaimer – The content on this page is for informational purposes only, and doesn’t 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 LLC?
Yes. You can sell your interest in an LLC through a partial transfer or a full transfer. Follow the instructions in your OA.
- Can an LLC issue new membership interests?
Yes, if it’s allowed under the provisions of the operating agreement or all members consent. Kentucky doesn’t prohibit an LLC from issuing new membership interests.
- How do I change ownership of an LLC with the IRS?
To notify the IRS of an LLC ownership change, you can file Form 8822-B. The law requires you to file this form within 60 days of the ownership change. If the change in ownership will result in the LLC changing into a single-member LLC, you can file Form 8832.
- Can an LLC member have no ownership interest?
Kentucky law allows for a person to be admitted as a member of the LLC even if they don’t have a monetary interest in the business. This is rare, but possible.