Montana LLC members have ownership interests in the LLC, referred to as distributional interest by Montana’s statutes, entitling them to participate in the management of the business. Additionally, LLC members are entitled to receive their fair share of the profits earned by the LLC and any other benefits associated with the business. But what happens when an LLC member wants out?
Take a look at our guide for transferring LLC ownership in Montana, and how our products and services can give you the tools to help your business grow.
LLCs v. Corporations
LLC formation is relatively simple compared to forming a corporation. LLCs have flexible management structures guided primarily by an Operating Agreement (OA) that outlines the internal workings of the business, while corporations are bound by the strict formalities of corporate law. For ownership transfers, the opposite is true.
Corporations issue shares of stock to their shareholders to signify an ownership interest in the corporation. The stocks are freely transferable, meaning shareholders can buy and sell shares in the corporation as they wish. LLCs issue membership interests in the LLC to its members, sometimes signified by a certificate. Membership interests in an LLC aren’t freely transferable and can only be transferred under the terms of the LLC’s Operating Agreement. Without an Operating Agreement, transferring Montana LLC membership interests is governed by state law.
First Things First: Montana Operating Agreements
Montana doesn’t require LLCs to adopt an Operating Agreement. Without an Operating Agreement, the Montana Limited Liability Company Act governs relations among the members, managers, and LLC. To avoid these default provisions, drafting an Operating Agreement is recommended. Creating an Operating Agreement offers certain benefits for your LLC, including:
- Helping show that yours and other members’ personal assets and liabilities are separate from the LLC’s financial assets and liabilities, in case your liability protection is ever challenged
- Resolving internal conflicts and preventing disagreements by providing clear instructions on business matters such as voting and tie-breaker decisions
- Providing insight to potential new members or investors on how your business operates
Your LLC’s Operating Agreement serves as a guidebook for the operations of your LLC and is a critical part of eliminating disputes surrounding your LLC.
Our Operating Agreement template can help you check that the basic characteristics of your LLC are laid out in the document. Additionally, you have full control to fill in your Operating Agreement with provisions you think will be beneficial for your LLC. Our template can help you tailor your OA to your business, so all your needs are addressed.
Partial Transfer in Montana: The Buyout Provision
When operating a business, there will inevitably be situations when a partner wants to leave. An LLC member can transfer his or her membership interest in the LLC to another individual, referred to as the transferee. However, that doesn’t give the transferee the same rights as the LLC member had. Transferees are only entitled to receive the distributions that the LLC member would have been entitled to, but aren’t allowed to participate in the management of the LLC. For a transferee to become a member, all the remaining LLC members must consent. Otherwise, the transferee must consult the Operating Agreement for the process of becoming a member.
Alternatively, the remaining LLC members can exercise the buyout provision of their Operating Agreement, meaning that they will purchase the departing member’s LLC interest and distribute the interest among the remaining members. The purchase requires a buy/sell agreement that details the terms of the transaction. The format of the buy/sell agreement will typically be laid out in your Operating Agreement.
Full Transfer: Selling Your Montana LLC
In some cases, LLC owners may decide they no longer want their business and seek to sell the entire company to a third party. A third party could be seeking to purchase the entire business, or only the assets of the business.
One of the topics to address in the Operating Agreement for your Montana LLC is the process for selling the entire company. Unless your Operating Agreement says otherwise, all LLC members must consent to the sale.
Transferring an entire company is a complicated process involving detailed legal contracts. If you run into any roadblocks, it’s a good idea to consult with an experienced Montana attorney to ensure the process is completed correctly and efficiently.
Other Possible Issues
While a full transfer and a buyout sale are the most common issues associated with transferring LLC ownership, other circumstances exist that can trigger a change in ownership.
Death of a Member
Like any piece of personal property, a deceased member’s ownership interest in the LLC will pass to his or her surviving heirs through an estate plan or Montana intestacy laws. The individual who receives the ownership interest doesn’t receive it as an LLC member, but as a transferee.
To avoid any disagreements among LLC members, it’s usually a good idea to buy out the transferee’s interest through the process described above.
In some circumstances, the easiest way to transfer ownership in an LLC is to dissolve the business entirely, then create a new one. The Operating Agreement can describe circumstances that trigger dissolution of the LLC, or the LLC can be dissolved with the consent of all its members. After an LLC is dissolved, the LLCs assets are distributed in the following order:
- First, to creditors of the LLC to satisfy the liabilities of the LLC
- Second, to members of the LLC for their share of the distributions
- Lastly, to members for their portion of contribution to the LLC and for their ownership portion of the LLC
After you dissolve your LLC, you can file the Michigan Articles of Organization to create a new LLC, providing the names and addresses of the new LLC’s members.
File proper change of ownership paperwork in Montana
Montana’s Articles of Organization require LLCs to provide the names and addresses of their members. Thus, when you make a membership change, you have to file an Articles of Organization Amendment with the state to reflect the change.
Need help? ZenBusiness is here for you!
Despite the ease and flexibility of LLCs, transferring ownership can create complicated issues for business owners and other LLC members. Drafting a comprehensive and detailed Operating Agreement is the best way to limit the number of disputes and set out the procedures of your LLC from the outset of your business, rather than relying on default state laws once an issue occurs. Whether you’re just getting started or have been in business for years, our Operating Agreement template is a great place to start.
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?
The terms of your Operating Agreement will lay out the process for selling your membership interest in the LLC.
- Can an LLC issue new membership interests?
LLCs can issue new membership interests with the consent of all members of the LLC, as long as issuing new membership interests isn’t prohibited by the Operating Agreement.
- How do I change ownership of an LLC with the IRS?
The IRS requires LLCs to be classified as either corporations, partnerships, or sole proprietorships, as it doesn’t recognize an LLC as a business entity.
If you sell your entire LLC, file a Form 8822-B, Change of Address or Responsible Party – Business, with the IRS within 60 days of the sale to reflect that another party is responsible for the business.
- Can an LLC member have no ownership interest?
No, all LLC members have an ownership interest in business. Even LLC members who don’t regularly participate in the management of the LLC have an ownership interest in the business.
LLC members can hire managers who don’t have an ownership interest in the business to manage the day-to-day affairs of the LLC.