Limited liability companies (LLCs) are a popular option for business owners because of the flexibility they offer compared to other business types. However, when it comes to selling or transferring ownership of an LLC, the process isn’t as straightforward.
It all comes down to how ownership vests in an LLC. Whereas corporations divide ownership using stocks, LLC ownership vests directly with the LLC’s members. Where a corporation’s shareholders can easily buy and sell their shares of stock, an LLC member can’t—at least, not without the consent of the other members. This article will provide an overview of the LLC ownership transfer process, but if you’d like more information on LLCs, visit our Nebraska LLC formation page.
The Operating Agreement (OA) is the part of an LLC that tells its members how they should run the business. For example, the OA contains information about the responsibilities of its members and, of course, how to transfer ownership.
Some jurisdictions require LLCs to submit an OA when filing the LLC’s formation documents. However, many jurisdictions, including Nebraska, don’t. When an LLC doesn’t have an OA, state laws provide “default” provisions in its place. However, if the LLC does have an OA, it’s the first place an LLC’s members will look for directions. If you’re in need of your own OA but don’t know where to start, we can help you get started with our Operating Agreement template.
One way to transfer ownership of an LLC is through dissolution. However, this is a drastic step that isn’t always necessary. Fortunately, there are two generally accepted methods for transferring ownership that don’t involve dissolution.
Under certain circumstances, a member may transfer their own membership interest to a third party or the other members. Typically, the Operating Agreement will outline rules for transferring membership. This may include provisions identifying events that will trigger a buyout by the other LLC members. A buyout usually employs a buy-sell agreement, which is a legal document that will help protect the members’ interests and contribute to a successful transition. After the buyout, the remaining members divide the departing member’s ownership interest among themselves, and the LLC continues operating with fewer members.
The OA will have more detailed instructions on how the buy-sell agreement works. If it doesn’t, don’t worry; most jurisdictions permit the use of a buy-sell agreement even without an OA on the books.
Of course, having a comprehensive and detailed OA is useful for avoiding issues when it comes to a buyout. Without one, you run the risk of disagreement between the members that could significantly complicate the process. What’s more, a comprehensive OA gives each member an equal opportunity to assert their rights within the LLC as a whole.
When all members want to sell their ownership interests, the members can sell the entire LLC to a third party. This sale often involves the entire business, but that isn’t always true. For example, a buyer may be interested in the business’s assets, but not the business entity itself.
The Operating Agreement itself typically has all the information you need concerning the procedure for a full sale. Typically, all members of the LLC must consent to this option before it can move forward.
Selling the LLC is much more complicated than executing a buyout provision. In both cases, hiring a lawyer can be a good idea. But this is especially true if you’re selling the LLC in its entirety.
During its lifetime, an LLC may experience other issues related to ownership as well.
When an LLC member dies, their interest passes to their heirs (usually a spouse or surviving children). Even though the deceased member’s heirs can’t assert management rights in the LLC, they are entitled to profits and benefits. To avoid further complications, the LLC’s remaining members may elect to buy out the deceased member’s heirs and return the full interest to the remaining members.
Rather than a full or partial transfer, an LLC’s members can change ownership by dissolving the LLC and reforming it as a new LLC. This option also gives potential new members an easy opportunity to join.
Regardless of which method of ownership change occurs, don’t forget to report the change to the proper authority. In Nebraska, the Secretary of State requires notice of changes to the LLC. For more information, visit sos.nebraska.gov.
Transferring an LLC can be a hassle, but it doesn’t have to be. The key is to have a solid OA in place to reduce as many ambiguities as possible. ZenBusiness offers an Operating Agreement template to get you started.
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.
Yes. Members of an LLC are permitted to sell their ownership interest, but the sale must conform to the requirements set out in the LLC’s Operating Agreement.
Yes. A new member can join an LLC and receive their own membership interest. However, they may only do so if the LLC’s existing members consent to the addition of the new member.
The IRS doesn’t recognize “LLC” as a specific taxable business entity because LLCs are organized under state law, rather than federal. Instead, the IRS taxes LLCs as corporations, partnerships, or part of their owner’s individual tax return. Accordingly, there’s no need to report change of ownership with the IRS. However, if the “responsible party” designated during the EIN process changes, the IRS requires notice of that change.
No. By definition, an LLC “member” is someone with an ownership interest in the LLC. As a result, all LLC members must have at least some ownership interest, even if they don’t take an active role in managing the LLC.