There are times when transferring ownership in a Massachusetts limited liability company (LLC) may become necessary. Sometimes, one or more members may want to leave the business. In other cases, all owners of the LLC may agree that transferring the entire business entity to a third party is in the best interests of everyone involved.
Regardless of the scenario, transferring LLC ownership is not as easy as it is with other business types. For example, while forming a Massachusetts LLC is often simpler than forming a Massachusetts corporation, transferring ownership can be much more complex with an LLC as compared to a corporation.
This is because whereas a corporation’s ownership is vested in shares of stock, which are more easily transferred or sold, ownership in an LLC is vested in the individual members and cannot be fully transferred without the consent of all other members of the LLC.
Transferring LLC ownership in Massachusetts can be a complicated process. Nevertheless, it can be done. Check out our guide below on how to transfer ownership of an LLC in Massachusetts.
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Massachusetts law defines an Operating Agreement (OA) as “any written or oral agreement of the members as to the affairs of a limited liability company and the conduct of its business.” Thus, the OA more clearly defines the structure of your Massachusetts LLC and provides details for the internal processes of the business, the working relationship between and among the LLC members, and other important information.
When you formed your company, you may have created an Operating Agreement for your Massachusetts LLC. If you did, the specific requirements and procedures governing the transfer of LLC ownership for your business will likely be addressed there.
Operating Agreements aren’t required for LLCs under Massachusetts law, so it’s possible that your business doesn’t have an OA in place. If your business does not have an OA, or your OA doesn’t address LLC transfer of ownership, don’t worry. You’re still able to transfer ownership — you will just be subject to the default rules for ownership transfer as defined by Massachusetts law.
While it’s perfectly acceptable to proceed with the default rules under Massachusetts law, having personalized rules and procedures for your Massachusetts LLC is often preferred. Having a customized Operating Agreement in place can provide your business with more clarity and flexibility that the default rules may not provide.
If you don’t have an Operating Agreement yet for your business, don’t wait any longer. Use ZenBusiness’s Operating Agreement template as a guide for you to draft a customized Operating Agreement for your Massachusetts LLC today.
Notably, Massachusetts law does not require Operating Agreements to be in writing. Nevertheless, having your OA set forth in writing is a best practice and is the best way to prevent confusion and disputes regarding the precise terms of the Operating Agreement moving forward.
Generally speaking, there are two primary methods of transferring an LLC ownership interest without legally dissolving the entity as a whole: a partial sale or a full entity sale.
The first method is the partial sale, which often involves a “buyout.” A buyout will occur when one or more members desire to leave the business and the remaining members of the LLC make a deal to purchase the departing members’ interests and split that interest among themselves. The legal document accomplishing a buyout is usually referred to as a buy/sell agreement.
If your LLC has an Operating Agreement, the instructions for a partial transfer of LLC ownership interests will more than likely be addressed in more detail in the OA. Otherwise, the default procedures under state law will prevail.
Massachusetts law does state that an ownership interest in an LLC is assignable in whole or in part. Thus, an individual member may assign their interest to another individual or entity without consent of the other members. However, the transferee of such an interest is only entitled to receive profits, losses, distributions, and other similar interests. The transferee may not participate in the management of the business unless all other members of the LLC consent or the Operating Agreement for the LLC provides otherwise.
Again, while the default procedures under Massachusetts law will be sufficient, having a comprehensive and detailed Operating Agreement for your business is the best way to provide clarity and prevent confusion and disputes among LLC members.
A full sale is another common method of transferring ownership in an LLC.
This can be accomplished by selling the entire business entity, or sometimes just the business’s assets, to a third party. As with a partial sale, the process for selling the LLC will likely be detailed in the Operating Agreement.
Unless your LLC has an Operating Agreement that states otherwise, an LLC may be sold only if all members consent to the sale.
While a partial transfer and full sale are probably the most common scenarios in which an LLC transfer of ownership will occur, they aren’t the only ones.
Occasionally, an LLC member may pass away unexpectedly. When this happens, unless the Operating Agreement specifies otherwise, the deceased member’s interest will typically be transferred to their spouse, children, or next of kin.
As noted above, however, the transferees of the interest will only be entitled to receive the deceased members profits, benefits, and other similar interests. They won’t have any right to participate in the management of the LLC unless and until all other members consent, which may be accomplished through a buy/sell agreement. More likely, the remaining members will buy out the heirs’ interest.
Sometimes, the members of the LLC may wish to dissolve the entire business entity.
A dissolution means that the LLC will cease to be a legal business entity. Possible reasons for dissolving an LLC might include:
After dissolution of the LLC, all members can part ways, and those who want to continue doing business together, if any, can form a new business entity entirely and admit new members if desired.
Throughout the life of your LLC, there are bound to be changes. Whenever those changes do occur, don’t forget to provide formal notice by filing any necessary amendments and other paperwork with the Massachusetts Secretary of State.
Transferring ownership in a Massachusetts LLC isn’t always straightforward and the process can vary widely from business to business. Nevertheless, one thing is almost always true — having a comprehensive Operating Agreement is often the key to making the transition smooth. Need help drafting an Operating Agreement for your Massachusetts LLC? Use our Operating Agreement template to help you get started. Looking for more tools and services for LLCs? Take a look at our full slate of formation and compliance products and services.