Despite the ease and flexibility of forming a Tennessee LLC, transferring ownership in the business presents an array of challenges for business owners. Unlike corporations, LLCs lack strict formalities that govern the business, making things like ownership transfers more complicated.
Transferring Ownership in Corporations vs. LLCs in Tennessee
Corporations issue shares of stock to owners of the business, who are known as shareholders. These stocks and the ownership rights that come with them are freely transferable to qualified purchasers. LLC ownership, on the other hand, vests in the individual members of the LLC. Tennessee law refers to an LLC member’s interest in the business as their “membership interest.” This ownership interest is made up of financial rights and governance rights in the LLC. Tennessee defines financial rights as a member’s rights to:
- Share in the profits and losses of the LLC
- Share in and receive distributions from the LLC
- Receive liquidation distributions in the event the LLC is dissolved
Tennessee law describes governance rights as a member’s right to participate in the management of the LLC. All of these rights can be altered as members see fit by the Operating Agreement (OA). The guide below describes the most common situations giving rise to LLC ownership transfers in Tennessee, and how ZenBusiness’s tools and services can help your business succeed.
If you need to form an LLC, head over to our Tennessee LLC formation page.
First Things First: Tennessee Operating Agreements
While Tennessee doesn’t require LLCs to adopt Operating Agreements, the document provides LLC members the opportunity to choose for themselves what rules govern the business.
An LLC’s Operating Agreement should detail information about the structure of the business, the roles and responsibilities of LLC members, and voting procedures. Additionally, the OA usually covers:
- The percentage of ownership for each LLC member
- The distribution of profits and losses
- Dispute resolution procedures for internal and external conflicts
To prevent confusion down the road, Operating Agreements should include provisions that cover the transfer of ownership. This includes procedures for:
- When an LLC member wants to leave the business
- When new individuals want to become LLC members
- Other circumstances that involve the transfer of LLC ownership
By taking the time to draft a thorough a comprehensive Operating Agreement at the outset of the business, LLC members avoid future hassles. Properly outlining the procedure for ownership transfers allows everyone to know what to expect, and can help avoid in-fighting.
As you can see, the Operating Agreement functions as the overarching document for an LLC. The options available to business owners drafting an operating agreement can be overwhelming. ZenBusiness offers a customizable Operating Agreement template that gives business owners important guidance for creating an OA tailored to your business’s needs.
How to Transfer Ownership in a Tennessee LLC
The two common methods for transferring LLC ownership are: (1) a partial ownership transfer, and (2) a full ownership transfer. While the two methods are different, a well-drafted Operating Agreement can alleviate the stress and confusion of both.
Partial Transfer in Tennessee: The Buyout Provision
An LLC member may decide to leave the LLC unexpectedly. The remaining LLC members can make a deal to purchase the membership interest of the departing LLC member . This is referred to as a buyout. The LLC members execute the purchase through a buy/sell agreement with the departing member. The Operating Agreement can detail the information included in the buy/sell agreement. After the buyout, the remaining LLC members distribute the purchased membership interest equally amongst themselves.
Subject to the terms of the Operating Agreement, LLC members can also sell their membership interest to a third party, known as the transferee. The transferee receives the financial rights in the LLC only. The financial rights include the right to receive the distributions and benefits the departing LLC member would’ve been entitled to. The transferee doesn’t receive management rights in the company, known as governance rights in Tennessee.
The Operating Agreement can outline the procedure to allow transferees to become LLC members, or a transferee can become an LLC member with consent of the remaining LLC members.
Full Transfer: Selling Your Tennessee LLC
A full ownership transfer presents more challenges than a partial transfer, as an entirely new party now holds responsibility for the business. Additionally, a full ownership transfer requires consent of every LLC member. Your LLC’s Operating Agreement needs to provide detailed information for initiating a full transfer of your LLC, including information such as:
- Classifying whether the purchaser wants the entire entity or just the business’s assets
- Terms to include in the buy/sell agreement
- Steps for completing the transaction
A full ownership transfer requires extensive knowledge of business contracts and transactions. A Tennessee attorney knowledgeable in these areas can provide guidance to ensure the process complies with state law.
Other Possible Issues
While the most common scenarios are described above, other situations require LLC ownership transfers as well.
Death of a Member
The unexpected death of an LLC member results in his or her financial rights in the LLC being passed according to the terms of his or her estate plan or intestacy laws. The person who receives the financial rights, known as the deceased member’s heir, doesn’t receive the right to participate in the management of the LLC. Typically, executing the buyout process described above is the best option for the LLC.
Alternatively, the heir can become an LLC member with consent of all other LLC members or under the terms of the Operating Agreement.
Dissolution and Reformation
When you want to add and remove multiple LLC members at the same time, there’s an easier alternative than performing multiple partial transfers. Instead, consider dissolving your current LLC, distributing each member the value of his or her interest, then forming a new LLC with new members. ZenBusiness offers LLC formation services and can handle the filing requirements for you.
File proper change of ownership paperwork in Tennessee
Tennessee doesn’t require LLCs to provide the names of LLC members on the Articles of Organization. Tennessee requires LLCs to submit annual reports reflecting the most updated information about the business. If your LLC experiences an ownership change, it can be reflected on the annual report.
Learn how ZenBusiness’s tools and services can help your Tennessee business grow!
Without an Operating Agreement, transfers of ownership in an LLC can cause internal disputes among members of your business. Adopting a well-drafted OA can lay out the necessary procedures at the outset of the business formation process, preventing conflicts down the road.
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?
Yes. The terms of an LLC’s Operating Agreement should describe the process for members seeking to sell their membership interests, but state law is the default. Without an OA to state otherwise, the selling member must get consent from all other members before selling their interest in an LLC.
Can an LLC issue new membership interests?
Subject to the terms of its Operating Agreement, an LLC can issue new membership interests with the consent of all members of the LLC.
How do I change ownership of an LLC with the IRS?
The IRS requires LLCs to be classified as either corporations, partnerships, or sole proprietorships.
If you sell your LLC, file a Form 8822-B, Change of Address or Responsible Party – Business, with the IRS within 60 days of the sale. This form reflects that another party is now responsible for the business and its tax obligations.
Can an LLC member have no ownership interest?
All LLC members have ownership interests. Part of being an LLC member is having an ownership interest in the LLC, which includes the right to have a say in the LLC’s management. For ownership rights passed via probate (will or trust), the deceased person’s heirs only have a right to monetary distributions from the LLC, meaning they are not full members.