Transferring ownership in your LLC can be a complicated process, especially in light of how relatively simple it is to create an LLC. Compared to the process for corporations, transferring ownership in an LLC poses different challenges.
In a corporation, ownership interest is vested in shares of stock, which are freely transferable through purchases and sales of those shares. In an LLC, however, ownership is vested in the individual members. This can make transferring ownership much more difficult, as ownership interests can’t be transferred without the unanimous consent of all other members of the business.
Admittedly, transferring ownership in a Minnesota LLC can be somewhat complicated. But with the right guidance, the process can feel much more manageable. If you have questions about transferring LLC ownership in Minnesota, or about LLC formation, we are ready to provide a helping hand.
First Things First: Minnesota Operating Agreements
The first step toward a smooth transfer of ownership is having a detailed operating agreement (OA) in place for your Minnesota LLC.
Your operating agreement will be one of the foundational documents for your new business. It should detail important information about the internal structure of the LLC and procedures for the management and operation of the entity and its members. Specifically, Minnesota law provides that an OA may govern:
- Relations among the members and between the members and LLC
- The rights and duties of managers of the LLC
- Activities of the LLC and the conduct of those activities
- The procedures and conditions for amending the Operating Agreement
There is no requirement that a Minnesota LLC must have an Operating Agreement. But to the extent that your LLC does have one, the entity and its members are bound by the terms of the OA.
If your business does have an Operating Agreement, this is likely where the procedures governing the transfer of LLC ownership will be located. Otherwise, the default procedures under Minnesota law will govern the process.
Although an Operating Agreement isn’t required, having one is nevertheless strongly recommended. A detailed and comprehensive OA will help to prevent future conflicts and better safeguard your LLC and its members.
Each business is unique, and knowing what to include in the Operating Agreement for your LLC can feel stressful. But know that you don’t have to figure this out on your own. We can help you get started today with our LLC Operating Agreement template.
Partial Transfer in Minnesota: The Buyout Provision
When a member of your LLC wants to leave the business, the easiest way to let that member out without affecting other aspects of the business is to buy out their ownership interest in the LLC. This is referred to as a buyout.
A buyout allows the remaining LLC members to purchase the ownership interest of the member or members seeking to leave the LLC and split ownership of that interest among the remaining members.
The terms of the buyout will be specified in a legal agreement, typically called a buy/sell agreement. A buy/sell agreement typically includes information such as:
- The monetary value of each member’s interest in the business
- The valuation method used
- Whether a departing member of the LLC can force a buyout
- Events that trigger a buyout
- How members exiting the LLC will be paid
- Who is permitted to purchase an ownership interest in the LLC
A thorough Minnesota operating agreement will lay out detailed information about the process for completing a buyout. Having a buy/sell agreement isn’t legally required. However, having one in place can help prevent disputes among members in the event a partial transfer is necessary or desired.
Full Transfer: Selling Your Minnesota LLC
In some cases, you may decide that running the business is no longer the best option moving forward. Rather, you and the other members may want to sell the LLC. This might mean selling the entire entity or just the company’s assets.
Before proceeding with a full sale of the LLC, there are a few steps to take. These steps include:
- Consulting your LLC’s OA or applicable Minnesota law to understand the proper procedure for completing the sale
- Getting the approval and consent of all other members of the LLC, unless your OA states otherwise
- Drafting and executing a buy/sell agreement that clearly defines the terms of the sale
Selling your entire business is a complicated process and can result in unexpected repercussions if not done correctly. Thus, it’s recommended that you consult with a Minnesota attorney with experience in business law before taking any next steps.
Other Possible Issues
The situations above represent the most common situations requiring LLC ownership transfer. However, other circumstances could arise triggering a transfer of your LLC.
Death of a Member
Upon the death of an LLC member, his or her interest will pass to his or her heirs, just like any other piece of personal property. However, the heir will only receive rights as a “transferee.”
The transferee isn’t entitled to participate in the management of the LLC and will receive only the benefits and percentage of profit that the deceased member would have been entitled to. Because of this, in the case of a deceased member, the best course of action is typically to purchase the transferee’s interest in the LLC through the process detailed above.
Sometimes, you may have multiple members seeking to leave the LLC. At the same time, you might also have several individuals seeking to become members of the LLC. When this happens, the best option may be to just dissolve the business and reform a new entity rather than drafting multiple buy/sell agreements. Upon dissolution, the members of the LLC will receive their share of interest. Then, when you form your new Minnesota LLC, you can easily add whomever you want as LLC members.
File proper change of ownership paperwork in Minnesota
The LLC’s members don’t need to be listed on the Articles of Organization for a Minnesota LLC. However, Minnesota does require LLCs to submit an annual report reflecting any changes to the business. Thus, if you do make any changes in ownership of your LLC or sell your LLC entirely, you will need to update the Secretary of State in your annual report.
Get started on your Minnesota LLC Operating Agreement today
While Operating Agreements aren’t required by law in Minnesota, having one can prevent you from facing costly disputes among members and confusion about the procedures of your business.
Get off on the right foot by having a comprehensive OA in place. Use ZenBusiness’s Operating Agreement template to help you start drafting the document that will guide the internal processes of your LLC into the future. If you’re looking for information on LLC formation or legal compliance, check out this guide to our full slate of products and services.
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, LLC members may sell their individual interests in the business. Your OA for your LLC will likely detail the process for accomplishing such a sale.
- Can an LLC issue new membership interests?
Yes, but with caveats. An LLC may issue new membership interests in the company with the unanimous consent of all members of the LLC.
- How do I change ownership of an LLC with the IRS?
Typically, you won’t have to report changes to your LLC to the IRS. However, when you dissolve the business entity or change its tax classification, these changes must be reported to the IRS. You may also need to file a form 8822-B if the responsible party for your LLC has changed.
- Can an LLC member have no ownership interest?
All members of an LLC have an ownership interest in the business. A member can transfer the right to receive financial distributions from the LLC to someone else. However, they can’t transfer their membership interest without the consent of the other members.