Sometimes it’s the best financial, professional, or personal choice to move on from a business. When you sell your business, it’s important to take the proper steps to avoid possible complications. If you have an ownership interest in a limited liability company (LLC), there are a number of steps you need to take under Maryland law and/or your LLC’s operating agreement to ensure a valid transfer of your interest.
Read on to learn more about LLC transfers in Maryland, and how our team at ZenBusiness can support your business goals.
How do ownership transfers compare between LLCs and corporations?
The formation of a corporation is more complicated than the formation of an LLC because incorporating documents such as the Articles of Incorporation involve more formalities. But once you establish a corporation in the state of Maryland, dealing with ownership and the transfer of ownership is a simpler process.
Corporate Ownership in Maryland
Stockholders fund corporations. Individuals who hold stock in a Maryland corporation have an ownership interest in the corporation. Unless an individual corporation elects to restrict the transfer of stock, stockholders can sell their stock/ownership share fairly easily.
Maryland LLC Ownership
Members are the owners of LLCs. Members can have economic interests in the LLC, as well as noneconomic interests. Economic interests involve the right to receive a share of the LLC’s profits. A member’s noneconomic interests in an LLC include the right to:
- Inspect the LLC’s books and records
- Manage the LLC
- Vote on LLC matters
- Be an agent for the LLC
Noneconomic LLC ownership interests aren’t as easily bought and sold as corporate interests. Even if an OA doesn’t elect to restrict the transfer of a membership interest, Maryland law still requires LLCs to follow certain transfer protocols.
If you would like more information about how to form an LLC, you can visit ZenBusiness’s Maryland LLC formation page.
Set your own ownership transfer terms with a Maryland operating agreement
You likely formed an LLC to have some control over your business liabilities. You can take even more control over your business by executing an operating agreement (OA). Without an OA, Maryland law dictates how you can transfer ownership of your business, which may not be the best method for your situation. An OA allows you to customize transfer and sale procedures.
What is an operating agreement?
An operating agreement is an agreement between LLC members that dictates how the LLC handles its affairs and business. A Maryland LLC doesn’t need an OA to conduct business, but it’s better to have one to manage expectations and run a business smoothly. Operating agreements can include many provisions such as:
- How to manage the business
- How members will share assets and profits
- The rights of members to assign full or partial membership interests
- How to admit new members
- How to amend the OA
- How to set and conduct meetings
If you have an OA that has buying and selling provisions for your LLC, transfer of ownership is straightforward: just follow its terms.
How do I create an operating agreement?
Maryland law does not require your OA to take any specific form or even that your LLC has an operating agreement. However, it’s highly advisable to have a thorough OA in place. If you don’t know how to start your OA, ZenBusiness makes it easy with our Maryland operating agreement template. This can help you identify issues to address in your OA and include important terms that will give you clarity when issues, such as transfer of ownership interests, come up in the future.
How to Transfer Ownership of an LLC in Maryland
Once again, you can decide how to transfer ownership of your LLC by creating an operating agreement. Without one, you transfer ownership under Maryland law.
Partial Transfer of Ownership
Transfers of Maryland LLC ownership rights aren’t always a complete overhaul. If some members want to remain while others wish to withdraw, they can conduct a partial transfer of interests.
The Buyout Provision
If you want to withdraw from LLC membership without dissolving the company, you can choose a buyout option. The withdrawing member authorizes the transfer of their membership interests, and the remaining members purchase this interest from the withdrawing member. Then, their share of the LLC’s ownership is divided amongst the remaining members.
One of the most important ways an OA helps LLC transfers is through buy/sell agreements, which detail the purchase and sale of a membership interest. An agreement memorializes the sale terms and reduces the likelihood of legal action. Having a detailed OA reduces fighting and legal action by setting and managing expectations from the beginning.
Full Transfer of Ownership
If the LLC wants to sell all of the business to a third party, the members must follow the operating agreement or get the consent of two-thirds of the members. It’s important and helpful for an OA to give a detailed process for selling the entire LLC. Selling a Maryland LLC can have many tax, debt, and legal implications that you don’t want to handle without professional advice.
You can also transfer ownership of a Maryland LLC by completely dissolving it. This frees up members to sell their ultimate shares of business assets to third parties. Dissolution of an LLC generally requires following the dissolution terms of the OA or unanimous consent of the members. You can dissolve the LLC by filing Articles of Dissolution and Articles of Cancellation with the State Department of Assessments and Taxation. Between dissolution and cancellation, you wind up the affairs of your LLC.
Death of a Member
If an LLC member ceases to be a member because of their death, the LLC can pay their heirs fair value for the membership interest. If the LLC doesn’t buy out the heirs, then the heirs will receive the deceased member’s economic interest but not their ownership rights. If the last member of the LLC dies, the LLC generally dissolves within 90 days unless the deceased member’s successor agrees to continue the LLC.
Rely on ZenBusiness for a smooth ownership transition
You want to avoid unnecessary conflict in your business dealings as much as possible. An operating agreement makes it easier to conduct business and transfer LLC ownership in Maryland without conflict. You can use ZenBusiness’s Maryland operating agreement template to help you draft business procedures for peace of mind. In addition, we have a wide range of formation and compliance services that can help you focus on growing your business.
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 LLC?
Yes, you can sell your interest in the LLC, but the purchaser can’t become a member unless you follow applicable provisions from the operating agreement or the members unanimously consent.
Can an LLC issue new membership interests?
Yes. An LLC can accept new members according to the terms of an operating agreement or by unanimous consent.
How do I change ownership of an LLC with the IRS?
The IRS doesn’t specifically recognize LLCs. If your LLC has more than one member or is taxed as a corporation, you can reflect a change of ownership by cancelling your employer identification number (EIN), cancelling your IRS account, and/or having the new owner apply for a new EIN.
Can an LLC member have no ownership interest?
An LLC member’s ownership interest normally consists of economic and non-economic interests, but a person can acquire an economic interest in the LLC without becoming an LLC member.