A limited liability company (LLC) is a powerful tool for business owners who want to receive the liability protection shareholders in a corporation enjoy combined with the flexibility a small business needs to meet its daily demands.
LLCs have a simpler structure than corporations and are easier to form. However, if for some reason you are considering selling your interest in the LLC (or the entire LLC), there are some things you should know first. If you need help forming your Ohio LLC, we can help with that too!
We offer a range of formation and compliance services to give you the support you need so you can focus on growing your business. Let’s take a closer look at how to transfer an ownership interest in an Ohio LLC.
Transferring ownership in an Ohio LLC isn’t as easy as one might think. Ownership rights aren’t freely transferable in an LLC compared to a corporation. In the typical corporate structure, the owners of the company are stockholders. You don’t need permission from the other “owners” to buy and sell stock in the normal course of business.
LLCs have members instead of shareholders, and they’re the people who own the business. They might not run the day-to-day operations of the business, but they have a say in how the business runs as a whole. As a result of this unique ownership structure, an LLC member doesn’t have the same right to transfer ownership as a shareholder of a corporation does. Indeed, transferring ownership requires the consent of the other members.
In Ohio, LLCs are permitted, but not required, to outline in writing the terms and conditions that will govern the administration of the business. This document is called an Operating Agreement (OA). The OA establishes the rules for how the business will run, delineates the rights and obligations of the members, and outlines the duties of the management. The OA can also order when meetings will occur and how to modify the OA or your LLC’s Articles of the Organization.
In Ohio, you don’t have to have an Operating Agreement in place when you start your business. The members are free to adopt it anytime they want. But waiting too long before you draft and adopt an OA could be costly and might lead to an undesirable outcome. Ohio law defines the rights and responsibilities of your LLC’s members if you have no Operating Agreement or your OA is silent on a particular issue.
The safest course of action for you is to draft an Operating Agreement when you assemble your Articles of Organization. Don’t know where to start? You can draft one by using our Operating Agreement template. It’s quick and easy and gives you the options you need to put legal protections in place for you and your fellow members.
Having a buyout option in your Ohio LLC’s Operating Agreement can prevent a significant legal battle if one of your fellow members attempts to leave the LLC. A solid, well-written buy/sell agreement included in your OA lets members know how they can transfer LLC ownership in Ohio. Clear language in your OA could prevent in-fighting among the LLC’s members.
A standard buyout agreement or buy/sell agreement allows an exiting member to sell their membership interest back to the other members. This allows the departing member to recoup their investment and allows the existing members to split the rights sold back to the LLC’s members. A comprehensive and detailed OA allows all members to assert their rights in the LLC when someone sells their interest.
Ohio law will control what happens to the LLC if there is no Operating Agreement to guide the members.
In the absence of a comprehensive LLC that speaks directly to the issue, all members must agree before you can sell your LLC to a third party. Whether the buyer wants the entire business or just the assets, transferring ownership of the LLC’s assets requires consent. You can make the job a lot easier if you have a detailed OA governing the full transfer of the LLC rights to a third party. If you don’t have an OA or your OA doesn’t have any provisions that discuss selling the LLC’s assets completely, then Ohio law governs the transaction.
There are a few situations in which transferring ownership in an Ohio LLC is unavoidable.
The death of a member is a sad and tragic event. However, you must account for the possibility in your Operating Agreement if you want things to go smoothly if a member dies.
Membership in an LLC is private property, like a car or set of golf clubs. Therefore, it’s devisable, meaning that upon death the member’s interest passes to the deceased member’s heirs, typically their spouse and children. The member’s heirs don’t have a right to assert any power over the management interest in the LLC. Instead, they inherit the benefits and profits generated by the LLC.
The remaining members could allow an heir of the deceased member to become a member of the LLC. Notwithstanding, the best option typically entails buying the member’s rights back from the departed member’s heirs and redistributing the rights among the surviving members.
Dissolution of your LLC is something to consider when drafting your Operating Agreement. You may need to know in advance which events trigger dissolution.
Dissolution doesn’t have to happen automatically. Dissolving your LLC and reforming it might be the best option you have to continue on with your business in many circumstances. When you dissolve your LLC, you wind up the business, meaning liabilities will be paid, initial investments will be returned, and then profits will be distributed. You could reform the LLC after each member who wants out collects what’s rightfully theirs and moves along. Then, the members who want to stay can join the new venture.
One thing you must pay close attention to is filing the correct paperwork with the Ohio Secretary of State. Failing to file the correct documents timely could result in the state dissolving the entity. Therefore, it’s vitally important to follow all the filing requirements when you add or subtract members from your LLC.
If you want to transfer LLC ownership in Ohio, your LLCs Operating Agreement can give you a clear understanding of what is required of you. Our Operating Agreement template is a powerful and effective way to structure your LLC’s functioning, and our other tools and services can help you keep your business running smoothly.
Yes, you can. You need to consult your Operating Agreement to see the preferred method of selling your rights in an LLC. Depending on your OA, you will likely need full written consent of all the LLC’s members to sell your interest.
Yes, but the process is complicated unless the OA speaks directly to the issue. Otherwise, Ohio law kicks in and takes over as the default position.
You will want to direct any questions about your tax obligations to a certified tax advisor. Notwithstanding, you don’t have to apply for a new employer identification number (EIN) if your LLC only adds or subtracts members. You will need to apply for a new EIN if you dissolve your LLC and reform it.
All members have an ownership interest. They have the choice to participate in the LLC. All members retain the rights associated with being a member in an LLC.
Disclaimer: The content on this page is for information 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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