Michigan LLC members typically form an LLC with a common goal in mind. Sometimes, however, shifting priorities and changes in circumstances can lead to the breakdown of the business relationship.
When this happens, transferring ownership of the LLC may become the best alternative, whether that means purchasing an individual LLC member’s interest, or selling the entire entity. While transferring LLC ownership isn’t uncommon, it’s not a simple process. In fact, it can be incredibly complex if your LLC failed to detail the process in its Operating Agreement.
Even though forming an LLC is relatively straightforward compared to forming a corporation, the opposite is true when it comes to transferring ownership. This is because whereas a corporation’s ownership is vested in shares of stock, which are freely transferable, ownership in an LLC is vested in membership interests held by the LLC members themselves. Such individual ownership interests can’t be transferred without the consent of all other members of the LLC.
Feeling overwhelmed? Don’t be! ZenBusienss is here to help. Take a look at our guide below on how to transfer ownership of a Michigan LLC. For more information about forming an LLC in general, check out our Michigan LLC formation page today.
First Things First: Michigan Operating Agreements
While some states require LLCs to have an Operating Agreement, Michigan isn’t one of them. Nevertheless, having an OA for your Michigan LLC is strongly recommended to prevent unnecessary internal disputes down the road.
An LLC’s Operating Agreement will detail important internal rules and procedures of your business. Common OA provisions include:
- Procedures for admitting and removing members of the LLC
- The management structure of the LLC
- How profits and losses will be allocated
- Events triggering dissolution and winding up of the LLC
- Voting rules and requirements
If your business doesn’t have an Operating Agreement in place, your LLC will instead be governed by Michigan state law.
If your LLC has multiple members, there is always the potential that a member will want to leave the business at some point. With this in mind, including provisions in your Operating Agreement that clearly outline the process for buying out a member’s ownership interest can eliminate confusion and disagreements when the need for such transfers arises.
Because an Operating Agreement is drafted for your LLC specifically, you will want to tailor the document to meet the particular needs of your business. However, knowing what to include in your OA can feel overwhelming, especially for new business owners. Let ZenBusiness help you find the provisions that make the most sense for your business with our Operating Agreement template.
Partial Transfer in Michigan: The Buyout Provision
So what do you do when a member of your LLC no longer wants to participate in the business? One option is referred to as the partial transfer, or “buyout,” which is often accomplished through what is called a buy/sell agreement.
A buyout is a great option for those scenarios in which only one or a few members want to leave, but the remaining members want to continue running the business without interruption. Through a buyout, the departing member or members can sell their interests in the LLC, and the remaining members will split the departing members’ interests among themselves.
The precise procedure for a buyout will probably be detailed in your LLC’s Operating Agreement. If it’s not, then the LLC will instead be subject to the provisions for assignment of membership interests in an LLC under Michigan law. However, the default rules under Michigan LLC law aren’t extremely detailed and provide only a general framework for partial transfers.
Thus, the best way to prevent confusion and potential disputes in the future is to have a comprehensive and detailed Operating Agreement that clearly describes the process to be followed for your LLC.
Full Transfer: Selling Your Michigan LLC
Sometimes, a partial transfer might not be a great solution for the issues your LLC is facing. Perhaps a partial transfer is simply too tedious in light of the number of members that wish to leave the business. Or maybe not all members of the LLC agree to a buyout. In these cases, a full transfer might be a better option to consider.
A full transfer will result in selling the entire LLC entity, or just its assets, to a third party. Either way, the terms of your LLC Operating Agreement will control the proper procedure for doing so. Again, if you don’t have an Operating Agreement that addresses how your LLC should approach a sale of the business, you will instead follow the rules and requirements under Michigan law.
No matter what procedures you follow, it’s important to seek the advice of legal counsel before you move forward. Selling your LLC in its entirety is a complicated legal process that requires the assistance of a legal professional to better ensure that all steps are followed correctly.
Other possible issues
Partial and full transfers are probably two of the most common methods of transferring ownership in an LLC. However, they aren’t the only scenarios that could arise. Below are some other possible issues to be aware of when it comes to LLC transfer of ownership in Michigan.
Death of a member
When a member of the LLC passes away, it is important to know what to expect. As with most issues for your LLC, the proper procedure for navigating the death of a member will likely be detailed in the LLC Operating Agreement. Otherwise, the deceased member’s interest will pass to their heirs.
However, the heirs of the deceased member will typically not inherit any management rights in the LLC. Rather, they will only be entitled to receive the profits and other benefits of the deceased member’s interest.
In some cases, you might find that the business has run its course. When this happens, it might be in the best interest of the LLC to dissolve the business entirely.
A partial transfer or full sale of a business can sometimes be more stress than it’s worth. However, dissolving the LLC allows the members who want out of the business to be able to leave, while allowing other members to start a brand new business venture and even bring in new members if they want.
File proper change of ownership paperwork in Michigan
No matter what route you end up taking, make sure to file any necessary change of ownership paperwork. Whenever any changes in ownership for your LLC occur, it’s important to provide proper notice to the Michigan Secretary of State.
Contact ZenBusiness today
Navigating LLC transfers of ownership is never easy, but having a detailed Operating Agreement can make things less complicated. Don’t know where to begin? Use ZenBusiness’s Operating Agreement template to help you get started. And if you’re looking for more help with LLC formation and compliance, check out our full slate of products and services.
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. All members have the ability to sell their interest in the LLC. However, unless the Operating Agreement indicates otherwise, this can be done only with the consent of all other members of the LLC.
Can an LLC issue new membership interests?
Yes. An LLC is able to issue new membership interests in the business if all members of the LLC provide their consent to do so.
How do I change ownership of an LLC with the IRS?
Changes in ownership of an LLC don’t need to be filed with the IRS. In general, the only changes that must be reported to the IRS are those related to tax classification of dissolution of the entity. If the responsible party on your tax forms has left the LLC, you may also need to file the Change of Address or Responsible Party form 8822-B.
Can an LLC member have no ownership interest?
No. If you are a member of an LLC, you will have some ownership interest in the business. However, a person can have an interest in receiving a share of the LLC’s profits without being a member.