Business owners form limited liability companies (LLCs) for a wide variety of reasons. Inevitably, circumstances change among the LLC members, resulting in the need to transfer ownership of Utah LLCs. Alternatively, you and other LLC members may want to sell the entire LLC. While forming an LLC is relatively straightforward, transferring ownership of an LLC is often more complex than with other business entities. This is due to a couple of factors.
Ownership of an LLC vests in the LLC members subject to the terms of the LLC’s Operating Agreement (OA). Therefore, a well-drafted Operating Agreement that details the procedure for ownership transfers can simplify this process. In the absence of any OA provision to the contrary, an LLC member can only transfer his or her ownership interest in the LLC with the consent of the remaining LLC members. In contrast, corporations issue shares of stock to symbolize ownership in the company. Shareholders buy and sell shares of stock freely to qualified purchasers.
The guide below provides more information surrounding the most common situations requiring the transfer of ownership in a Utah LLC.
An LLC’s Operating Agreement provides information about the internal procedures of the business. Utah doesn’t require LLCs to adopt an Operating Agreement — but an LLC defaults to state law in the absence of one. An Operating Agreement allows LLC members to decide for themselves what rules they want to apply to their business. An Operating Agreement typically includes:
It’s best if your Utah LLC’s Operating Agreement addresses any circumstance that could occur in the course of operating your business. Therefore, the Operating Agreement can outline the process for transferring membership interests in the LLC.
Creating a document that governs the entire LLC challenges many business owners who are more concerned with the operations of the business. That’s why we provide Operating Agreement templates to simplify the process and help you select the provisions most suitable for your business.
A partial transfer of LLC ownership arises most commonly in two situations: (1) when an LLC member wants to leave the LLC, triggering a buyout of their LLC interest; and (2) when an LLC member sells their interest in the LLC to a third party.
Occasionally, a member of an LLC decides they no longer want to remain in the business, triggering a buyout of their interest. When this occurs, the remaining members of the LLC purchase the ownership interest of the departing LLC member and distribute the interest equally among themselves. The Operating Agreement for the LLC should detail the circumstances that trigger a buyout and explain the process for completing the purchase.
To execute a buyout, the remaining LLC members should enter a buy/sell agreement with the departing member that explains the terms of the sale. The Operating Agreement dictates the format and content of the buy/sell agreement.
Alternatively, the members of an LLC may decide to sell the entire business. A purchaser may show interest in purchasing the entity itself, or only the assets of the business. Unless the Operating Agreement says otherwise, all LLC members must consent to the sale. A detailed Operating Agreement provides guidelines for completing the full transfer, including what to address in the buy/sell agreement.
Situations forcing the full or partial transfer of LLC ownership occur in a wide variety of circumstances. The most common scenarios resulting in an ownership transfer are described below.
When an LLC member dies, their financial interest in the company is a tangible piece of personal property that passes with all other property according to the estate plan. The deceased member’s heir receives rights in the LLC as a transferee. Transferees hold a right to receive distributions and benefits from the LLC. However, transferees can’t participate in the management of the business. In most situations, purchasing the interest that passed to the deceased LLC member’s heir makes the most sense for the remaining LLC members. The remaining LLC members purchase the heir’s interest through the buyout process outlined above.
Alternatively, the heir can become an LLC member with the consent of the remaining members or by the terms of the Operating Agreement.
What if several LLC members want to leave the business at the same time? What if other individuals want to become new LLC members? In this situation, dissolving your Utah LLC and reforming a new one allows departing members to leave with their investment, and enables you to form another Utah LLC naming new individuals as the LLC’s members. Rather than executing multiple buy/sell agreements, forming a new LLC allows you to remove and add members in one swoop.
Utah provides a Limited Liability Company Registration Information Change Form that allows LLCs to easily report changes in membership.
LLC ownership transfers often create issues for business owners. A comprehensive operating agreement that thoroughly explains the procedures for making the transfers can make the process simple. If you’re forming an LLC, need a new operating agreement, or are looking for help with legal compliance, ZenBusiness is here to help. Take a look at our full slate of products and services to see the many ways we can help.
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.
Yes. The terms of your Operating Agreement will lay out the process for selling your membership interest in the LLC. The party purchasing your LLC interest receives the rights of a transferee only, unless the remaining LLC members consent to him or her becoming a member. Additionally, the Operating Agreement can provide a method for transferees to become LLC members.
Yes. Subject to the terms of the Operating Agreement, LLCs can issue new membership interests with the consent of all members of the LLC.
The IRS requires LLCs to be classified as either corporations, partnerships, or sole proprietorships, as it doesn’t recognize an LLC as a business entity.
If your LLC members decide to sell the entire business, 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.
All LLC members hold an ownership interest in the business.
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