When the time comes for your LLC’s ownership to change hands, you may be wondering what the process entails. We’ll preface this by saying it’s not as easy as selling your stock in a corporation.
Stocks are freely transferable and can be bought and sold relatively easily. Selling an ownership interest in an LLC is much more involved. For example, you need the consent of all LLC members to transfer your interest. What makes the LLC ownership transfer process even murkier is that LLCs can make their own set of transfer rules, whereas corporations are bound by certain legal formalities. For more information about creating an LLC in North Dakota, check out the LLC formation services we offer.
With all that said, the transfer process can be smooth if you have the right information and a thorough Operating Agreement to govern the process. Now let’s explore how to transfer ownership of an LLC in North Dakota.
When forming an LLC, there’s some paperwork involved. The two main documents are the Articles of Organization and the Operating Agreement (OA). These two documents serve very different purposes. You can think of the Articles of Organization as an application to form an LLC and the Operating Agreement as the instruction manual for your business.
North Dakota doesn’t require LLCs to adopt an OA, but they can help your business run much more smoothly. An OA can do the following:
This is just an example of some of the information an OA may contain. Without an OA, you default to North Dakota law on LLCs. By becoming a member of the LLC, you agree to the terms of the OA.
When it comes to transferring your LLC ownership interest, the first place you look for directions is the OA. If the LLC doesn’t have an OA or there’s nothing in the OA about selling ownership interests, the transfer is subject to North Dakota law.
If you need help creating an OA for your North Dakota LLC, we offer an Operating Agreement template to get you started. We can also help with the formation documents through our North Dakota LLC formation services.
To transfer LLC ownership in North Dakota without dissolving it, you can initiate either a partial transfer or a full transfer.
A partial sale occurs when one or more LLC members sell their interests to a third party or reach an agreement with remaining LLC members to purchase their interest through a buyout. A buyout increases the ownership percentages of the remaining LLC members. For example, if you have five members, each equally owning one-fifth of the LLC, and one member sells their interest to the others, the remaining four members would own one-fourth of the business, increasing their share of profits.
The entire transaction will be memorialized in a buy/sell agreement. Your LLC’s OA may have instructions on the terms of a buyout, such as price and permitted purchasers. If not, look at North Dakota law.
A full LLC transfer of ownership is when a new owner purchases the entire LLC. The purchaser can either buy the business as a whole or just the assets. You will draw up a buy/sell agreement and include key details such as what is being purchased and the consent of all members with an ownership interest in the LLC.
Again, first look at your OA for direction and then default to North Dakota law. Selling an entire business can be complex and full of legal, financial, and tax hurdles. You may need to consult with a business lawyer to help you with the transaction and make sure the sale is conducted fairly and accurately.
Certain situations may cause LLC members to transfer ownership of the business.
If an LLC member dies, in most cases the ownership interest passes to the member’s surviving spouse or children through their estate plan or through probate. They typically inherit only the right to receive benefits from the LLC, such as profits, and do not have the right to participate in the management of the LLC.
When this transfer occurs, usually the best option is for the remaining LLC members to buy out the spouse or child through a partial sale, as described above. You may also be able to purchase membership interest from the person’s estate.
Sometimes dissolving the entire LLC and starting a new one is the best option. For example, if multiple members want to sell their interests, the number of transfers can get messy.
As always, start with the OA to see what dissolution procedures you need to follow.
You will need to notify the North Dakota Secretary of State if you amend your Articles of Organization, dissolve your LLC, or if you add or remove members.
Navigating LLC transfers of ownership is not easy, but having a detailed Operating Agreement can make things less complicated. Don’t know where to begin? Use our Operating Agreement template to help you get started. And if you’re looking for more help with LLC formation and compliance, check out our full slate of products 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.
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