Your LLC can be your lifelong work, or it can be an asset to cash in on when the time is right. If it’s the right time for you to sell your interest in an LLC or the entire LLC, transfer of ownership is a little more complicated than most people expect.
Transferring Ownership Interest: LLCs v. Corporations
You might have structured your business as an LLC because organizing an LLC normally requires less work and fewer formalities than incorporating a business. Unfortunately, LLCs don’t boast the same simplicity over corporations when it comes to selling the business. It’s generally more complicated to transfer LLC ownership in Rhode Island than it is to transfer ownership of a corporation.
A corporation vests its ownership in shareholders. Shareholders can freely transfer their ownership and shares to someone else. Transferring an LLC member’s ownership interest involves more formalities than simply selling shares.
To learn more about how to form your LLC, please visit ZenBusiness’s Rhode Island LLC formation page.
First Things First: Rhode Island Operating Agreements
The best way to simplify the transfer of ownership of your LLC is to write your own rules in your company’s Operating Agreement. An Operating Agreement (OA) is a contract between LLC members that spells out how they intend to run their business. With an OA, you and any other LLC members can decide beforehand what procedures you want in place when it comes time to sell some or all of the company. In the event of an ownership transfer, you follow the provisions in your OA.
Some states require your LLC to have an OA, and some don’t. In Rhode Island, you don’t have to have an OA to start and run an LLC, but having one can make your professional life easier. If you don’t have an OA, then default provisions of Rhode Island law decide how you transfer ownership.
If you’re interested in getting your own Operating Agreement but don’t know where to start, ZenBusiness can help! We can provide you with a Rhode Island Operating Agreement Template that gives you a customizable structure for writing your own Operating Agreement.
Two acceptable ways to transfer ownership of your LLC without legally dissolving it are to make a partial sale (buyout) or a full sale of the entity.
Partial Transfer in Rhode Island: The Buyout Provision
A member can withdraw from the LLC. With detailed buy/sell provisions in an OA or Articles of Organization, remaining LLC members can buy back the withdrawn member’s ownership interest and divide it how they please.
If your LLC doesn’t have an OA, Rhode Island law states that you can assign/sell your membership interest to a third party. Assigning your membership interest doesn’t mean the assignee becomes a member of your LLC, it just means that the assignee has the right to receive your distributions from LLC profits. To transfer membership/ownership to an assignee, the members must unanimously consent.
While many jurisdictions don’t require you to have an OA to enter into a buy/sell agreement for selling ownership interests, your best option is to have a detailed and in-depth OA to properly address the rights of your members and diminish the likelihood of friction.
Full Transfers: Selling your Rhode Island LLC
A full transfer of your LLC could be a sale of all assets or a sale of the whole business. If your LLC doesn’t have an OA with transfer provisions, you need a majority of membership interests to agree to sell all LLC assets, merge with another business entity, or consolidate into another person or business entity.
It’s important to have a detailed transfer agreement in place to avoid confusion and potential lawsuits. It’s also important to consult an attorney for this kind of sale. Without an attorney, you could be exposing yourself and your business to unexpected legal consequences.
Other Possible Issues
Sometimes the need to change ownership comes from unforeseen tragedy or breakdowns in relationships.
Death of an LLC Member
Your membership in your LLC is also your personal property, meaning you can assign it in your will to a third party. This personal property can also get passed to your heirs through Rhode Island intestacy rules if you die without a will. But after your death, your assignee cannot become an LLC member (owner) unless the remaining members unanimously consent. If they don’t, the deceased person’s heirs receive an interest in the LLC’s profits, but aren’t a full member. In many cases, your best option is to have the remaining members buy out the heir’s interest.
You can also transfer ownership of an LLC in a less stressful way by simply starting over. If there’s no OA, it takes a majority vote of the membership interests to dissolve an LLC. Once the LLC is dissolved and creditors receive payment, members receive financial distributions and their share of the capital. An LLC completes dissolution and winding up of the business by filing Articles of Dissolution with the Secretary of State.
File proper change of ownership paperwork in Rhode Island
An LLC sale may require filing change of ownership paperwork with the Secretary of State. You may also need to file paperwork that shows a change of ownership with the IRS. Missing these steps can hurt you and your business.
Depend on ZenBusiness tools to start your Rhode Island business in the right direction
As a businessperson, you know there can be unexpected complications around every corner. Having an OA can be your first line of defense against unexpected problems. ZenBusiness’s Rhode Island Operating Agreement Template gives you the foundation upon which to build a solid OA.
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.
Can I sell my interest in an LLC?
Yes, your LLC membership interest is your personal property. But the person who buys your interest only receives your right to distributions. The purchaser can become an owning member with the other members’ unanimous consent.
Can an LLC issue new membership interests?
Yes. An LLC can admit a new member according to Operating Agreement provisions, or with the members’ unanimous consent.
How do I change ownership of an LLC with the IRS?
If your LLC has an Employer Identification Number and ownership changes, you need to file Form 8822-B to let the IRS know when the LLC’s address, location, or responsible party has changed. If the LLC’s responsible party changes, it must be reported within 60 days. Changes normally take the IRS four to six weeks to process.
Can an LLC member have no ownership interest?
No. Under Rhode Island law’s definition, an LLC member is a person with an ownership interest.