Situations arise in the course of operating a business that can trigger the need to sell a portion or all of your limited liability company (LLC). Despite the stringent requirements imposed by corporations, transferring ownership interest in a corporation is actually easier than doing so in an LLC. Here are some reasons why:
Below is a guide of the most common scenarios requiring the transfer of ownership in an LLC.
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Unlike other states, Missouri law requires LLCs to draft and adopt an Operating Agreement. The Operating Agreement functions as the governing document for your LLC. A typical Operating Agreement includes provisions addressing issues such as:
Your Operating Agreement creates the rules that govern your LLC. Any event that occurs in the course of operating your business that’s not addressed in your OA is governed by Missouri law. The Operating Agreement should contain provisions concerning the transfer of membership interests in the LLC. Operating Agreements consist of several provisions, and it can be overwhelming for business owners to attempt to create one from scratch. That’s why we offer an Operating Agreement template to help simplify the process for you.
A common reason for transferring a partial LLC interest is when a member of the LLC wants to leave the business. Subject to the Operating Agreement, the LLC member can assign his or her interest to another party, known as the assignee. However, unless the other LLC members agree for the assignee to become a member, the assignee does not receive the right to participate in the management and affairs of the LLC, only the right to receive distributions and benefits.
Alternatively, the remaining LLC members can buy out the departing LLC member’s interest in the LLC and distribute the interest amongst themselves. To execute a buyout, draft a buy/sell agreement detailing the terms of the transaction. Your properly drafted OA provides instructions for completing the buy/sell agreement. A detailed Operating Agreement is the best way to minimize disagreements among LLC members, especially when the desire to transfer membership interests arises.
Sometimes you may want to transfer your entire LLC to a third party. Before attempting a full transfer, take the following steps:
Selling a business is a difficult process that can present unexpected difficulties, so if you run into any issues, consult an attorney.
While situations requiring an LLC ownership transfer can be extensive, the most common scenarios are described below.
Upon an LLC member’s death, his or her membership interest in the LLC will pass according to his or her estate plan, just like any other piece of personal property. However, the heir won’t receive the membership interest in the LLC in the same capacity as the deceased member. The heir receives the same interest as an assignee, meaning they receive the benefits and percentage of profit from the LLC but have no management interest in the business. When this occurs, executing a buyout of the heir’s membership through the process detailed above is typically the best course of action.
There are times when dissolving your business and forming a new Missouri LLC creates less hassle and paperwork than executing multiple buyout agreements and adding several new members to the LLC. By forming a new LLC, you can replace the departing members with the new members at the same time.
Missouri law requires LLCs to file Articles of Amendment with the Secretary of State reflecting any management change in the LLC.
Without a comprehensive Operating Agreement, transfers of ownership in an LLC can be complex and cause internal disputes among members of your business. Adopting a well-drafted Operating Agreement can alleviate the stress of the process by laying out the necessary procedures at the outset of the business formation process.
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.
The terms of your properly drafted Operating Agreement lay out the process for selling your membership interest in the LLC. If your Operating Agreement doesn’t mention selling your membership interest, you’re entitled to assign the interest to another party. However, that party will only receive rights as an assignee, not as an LLC member.
LLCs can issue new membership interests, as long as all of the other members in the LLC consent to the new member’s admission. Your Operating Agreement can outline the process for doing so.
The IRS doesn’t recognize an LLC as an entity. Thus, LLCs are required to classify as corporations, partnerships, or sole proprietorships with the IRS.
If you sell your entire LLC, file a Form 8882-B, Change of Address or Responsible Party – Business. You file this form with the IRS within 60 days of the sale so that the IRS doesn’t hold you responsible for future tax responsibilities.
Members have an ownership interest in the LLC even if they delegate the management or operations of the business to a manager. Managers who are not members don’t have a membership interest in the LLC.