There may come a time when you need to transfer your ownership interest in a limited liability company (LLC). Whatever the reason, there are some important steps to take to properly transfer your LLC ownership in New York.
LLC transfer of ownership isn’t so simple, especially when compared to transferring ownership interests in a corporation. Corporate owners are called shareholders, and their interests are vested in stocks. Stocks can easily be bought and sold. And corporations follow strict formalities when it comes to their structure, which makes transferring stocks even easier.
LLC members are basically the LLC version of a shareholder. Each member holds an ownership interest in the LLC. But without the approval of all LLC members, you can’t just sell your interest in the LLC. Although it might sound complicated, if your LLC has the right information in its Operating Agreement (OA), you may have just what you need to start the ownership transfer process.
If you’re considering starting an LLC in New York, ZenBusiness can help you with the formation process through our New York LLC formation service. Now let’s learn how to transfer ownership of an LLC in New York.
First Things First: New York Operating Agreements
An OA is essentially the rulebook for a business. LLC members are bound by the terms of the OA, which establishes the rights, responsibilities, obligations, powers, and duties of the LLC members. New York requires all LLCs to adopt an OA within 90 days of filing their Articles of Organization. You don’t need to file the OA with the Department of State, but just keep a copy of it in your business records.
A well-written OA will have details on how to conduct a sale or transfer of an LLC ownership interest. Unfortunately, not all OAs are detailed enough, and some LLCs fail to adopt an OA altogether. In that case, you must look to New York law to determine how to transfer the interest.
One of the hallmarks of an LLC is flexibility in terms of the management and operation of the business. Unlike corporations that are required to maintain a certain structure, LLC members have the choice to run their business as they please within the confines of the law. If you don’t adopt or draft a thorough OA, you’re giving up that flexibility. With no OA in place, state law determines how you deal with situations like transferring your LLC’s ownership interests. Fortunately, ZenBusiness can give you the tools to create a detailed and comprehensive OA for your LLC. Check out one of our Operating Agreement templates to help you get started.
How to Transfer Your New York LLC Interest
You can transfer your New York LLC ownership interest through either a partial sale of just your interest or a full sale of the entire LLC.
Partial Sale in New York: The Buyout Provision
With a partial sale, the LLC member who wants out sells just his or her interest to a third party or the other members. If other members buy out the departing member’s interest, those members then divide up the transferred interest among themselves. This entire transaction will be documented in a buy/sell agreement, which is a legal contract between the LLC members.
Full Transfer: Selling Your New York LLC
If a partial transfer isn’t a workable solution, consider a full transfer of the LLC. All members need to consent to the sale of the whole LLC to a third party. Again, look to the LLC’s OA first for any direction on how to conduct the sale.
A full transfer of an LLC is complicated, so you may consider hiring a lawyer if you get to this point. With this type of transaction, you want to be sure everything is done correctly, and an experienced business lawyer can help with that.
Other Possible Issues
Death of a Member
The death of an LLC member can shake up the whole operation of an LLC. What typically happens is the deceased member’s ownership interest passes to a spouse or children and then the remaining members buy them out through a partial transfer. Those inheriting the interest don’t have any management power within the LLC but only a beneficial interest (i.e., they can receive LLC profits).
Dissolution and Reformation
Some circumstances may warrant an entire dissolution of the LLC. This gives members an opportunity to get out and others a chance to start a new LLC. Consult your OA to determine the process for dissolving your LLC.
File the proper change of ownership paperwork in New York
If you do transfer your LLC ownership interest and it changes the management structure of the LLC, you need to notify the New York Department of State. An example of this is if the LLC changes over from manager-managed to member-managed.
ZenBusiness is here to help your New York LLC grow!
The transfer of LLC ownership in New York takes some leg work, but it can be a smooth process if you have a thorough OA in place. Remember, ZenBusiness provides an OA template that can help you draft a comprehensive Operating Agreement, so you can feel confident and prepared for whatever issues arise. And if you need more information on how we can help you succeed, check out our full slate of formation and compliance tools and services.
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 a New York LLC?
As long as the LLC’s OA permits, you can sell your interest in a New York LLC. Look to the OA for instructions on how to transfer the interest. Otherwise, all members must approve the transfer.
Can a New York LLC issue new membership interests?
If all the LLC members agree, the LLC can issue new membership interests. But keep in mind that bringing in a new member decreases the individual ownership percentages of the other members.
How do I change ownership of a New York LLC with the IRS?
You only need to inform the IRS of an ownership change if it impacts who the LLC’s responsible party is. For more information about this, look at Form 8822-B: Change of Address or Responsible Party.
Can a New York LLC member have no ownership interest?
No. In an LLC, membership and ownership interest go hand in hand. Someone might have the right to receive distributions, but that does not make them a full member. Members have the right not just to receive distributions, but to have an equal say in how the business is run.