If you’re looking to form a business in New Jersey, you first must choose the business entity type that suits you best. Many choose a limited liability company (LLC), a flexible entity that requires fewer formalities than corporations while still offering personal liability protections. But if you or another LLC member wants to leave, the process isn’t as easy. If you are looking to transfer LLC ownership in New Jersey, there are a number of things to be aware of.
How to Transfer Ownership of a New Jersey LLC
One thing to keep in mind is that corporations and limited liability companies don’t operate in the same way, so what works for a corporation doesn’t work for an LLC. Corporations are owned by shareholders who hold stock in the business. This stock can be bought and sold with fewer hoops to jump through than LLCs. Limited liability companies are owned by members who have a vested ownership interest in the company.
The process of determining how to transfer ownership of a New Jersey LLC is a lot smoother if all of the pieces of LLC formation are in place. If you’re just starting your LLC, or want to make sure you aren’t missing anything, you may want to consider our New Jersey LLC formation service. You can also head over to the full rundown of all our services, from formation to legal compliance.
First Things First: New Jersey Operating Agreements
When you start a business you may or may not be considering all the possibilities of things that could go wrong. It’s certainly not a fun exercise to think about all the bad things that could happen, but it’s very important. An Operating Agreement (OA) tries to address all of these situations before they happen. It details rights, powers, duties, liabilities, obligations, and more. One of the most important aspects of the operating agreement is how to deal with changes to the business and membership structure. Important concepts include:
- Distribution of profits and losses
- Percentage of ownership interest
- Roles and responsibilities of members
- General operations of the business
- Dealing with conflicts of interest
- How to handle disputes between members
- Provisions for dissolution
- Ownership interest transfers
- Buy/sell agreements
The Operating Agreement isn’t submitted to the Secretary of State, but it’s a legally binding document according to New Jersey law. If you don’t have an Operating Agreement and don’t know where to start, we can help you get started with our Operating Agreement templates.
Types of LLC Ownership Transfers
Some states require the dissolution of the limited liability company if there’s no Operating Agreement. Again, that document is very important. There are two ways to transfer LLC ownership in New Jersey without dissolving the company.
Partial Transfer in New Jersey: The Buyout Provision
If a member chooses to leave the LLC for any reason, the remaining members may offer to buy out the interest and split it. If the member chooses to transfer the interest to a non-member, the non-member is considered a “transferee.” This person isn’t entitled to participate in the management of the company. They are entitled to distributions only. Unless otherwise agreed or stated in the Operating Agreement, the transferor retains all responsibility of a member. The existing members can consent to make the transferee a member of the LLC.
It’s important to note that the provisions of the Operating Agreement supersede state laws on LLC ownership transfers. State law may not always fit what’s best for your business, so having an agreeable OA could make a big difference in this process.
Full Transfer: Selling Your New Jersey LLC
For some companies, the ultimate goal is to build it up and make it worth purchasing. If you’re at that point, congratulations! There are also other situations where selling the LLC is an appropriate move. Regardless of your reasoning, a full transfer of ownership means selling the business. A third-party buyer may choose to purchase the entire business or just the assets. All members of the LLC must consent to the sale. Buy/sell agreements can be complex. So consider hiring a business attorney to oversee buy/sell agreements.
Other Possible Issues with New Jersey LLC Ownership Transfers
There are a lot of things to take into consideration when forming an LLC, and you can’t always foresee everything. These are a couple of other things to be aware of.
Death of a Member
When a member of the LLC dies, their ownership interest is treated as part of the estate. If not stated otherwise in their will, the interest passes to the next of kin. However, ownership management rights aren’t included. It’s a common practice for the other members to buy out the deceased’s heirs.
In New Jersey, an LLC ownership transfer by itself doesn’t cause the dissolution of the business. There’s a lot that goes into approving an LLC ownership transfer. Depending on the status of the business and mindset of members, it may be easier to dissolve the limited liability company and reform as a new one. If you decide to go this route, make sure that all dissolution paperwork is filed and that your new LLC is formed with all necessary details.
File proper change of ownership paperwork in New Jersey
Once the transfer is complete, the LLC should file a Certificate of Amendment to the formation agreement to reflect the new ownership. This is filed with the Secretary of State.
Tips to Transfer LLC Ownership in New Jersey
The most important thing you can do to simplify the process is to have a detailed and comprehensive Operating Agreement with provisions for ownership transfers. If you don’t have one, ZenBusiness is here to help with our OA templates and many other tools and services to help you and find peace of mind knowing you have the right tools to help make your business a success.
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?
You can sell your financial interest in an LLC. You may sell the interest to existing members, as part of a full transfer, or to another person. If you sell to someone who isn’t a current member, they won’t retain management rights.
- Can an LLC issue new membership interests?
An LLC can issue new membership interests if approved by all current members. You need to file an L-102 form, also known as a certificate of amendment, with the New Jersey Secretary of State.
- How do I change ownership of an LLC with the IRS?
Ownership changes must be reported to the IRS within 60 days of the change using Form 8822-B.
- Can an LLC member have no ownership interest?
An LLC can distribute ownership as it sees fit so long as it’s within the stipulations of the Operating Agreement. Generally, members have ownership interests in the company with the exception of someone who has been transferred rights. Unless approved by the existing members, the transferee will have a financial interest but no management rights.