Limited liability companies (LLCs) are a popular form of ownership in Virginia. LLCs afford business owners many of the legal protections corporations enjoy. Additionally, LLCs offer flexibility to run the business without the formalities of a corporation. If you need to form your LLC first, check out our Virginia LLC formation page.
The lack of formalities in an LLC’s structure could make it difficult to sell. According to Virginia law, owners of an LLC are called members. The members of an LLC cannot sell their ownership interests unless all of the members consent to the sale. In corporations, shareholders hold ownership interest that is freely transferable. Conversely, the lack of formalities in LLCs makes selling interests more difficult.
So, how do you transfer ownership interest in a Virginia LLC? Let’s take a look.
First Things First: Virginia Operating Agreements
An Operating Agreement, or OA, is a document that governs the rights and obligations of the members. The OA can be as thorough or as vague as you desire. However, members will look to the OA to resolve any disputes that arise. Virginia law supplies any rights and responsibilities not contained in the Operating Agreement or in the absence of an OA. Thus, having a comprehensive OA is advantageous for LLCs.
Virginia law requires that all members initially agree to the terms of the Operating Agreement. However, Virginia law allows an oral agreement to suffice. Having an oral Operating Agreement or even an informal written agreement isn’t in the best interests of any member, even if the Articles of Organization allow for it. A written OA is a better practice.
A comprehensive Operating Agreement allows for the sale or transfer of a member’s interest. If you need an OA but don’t know where to start, ZenBusiness can help you draft one with our VA Operating Agreement template.
How to Transfer Ownership of an LLC in Virginia
Incorrectly transferring ownership of your LLC in Virginia could lead to disastrous results. If you do it wrong, you could wind up with no members, and therefore, no one to own the LLC. At that point, Virginia law might dissolve the LLC. However, Virginia law recognizes two ways to transfer ownership of an LLC without dissolving the company — buy/sell agreements and selling the LLC entirely.
Partial Transfers of Ownership in Virginia: Buy/Sell Agreements
Including a buy/sell agreement in your OA is a wise move. Although you might not believe that a fellow member would want to transfer their interest in your LLC, circumstances in life sometimes necessitate selling. Consequently, including a buyout provision can avoid a significant legal problem.
One way to avoid a protracted legal dispute is to draft a buy/sell agreement and include it in your OA. The LLC could create a buy/sell agreement as a stand-alone legal document. But including a buy/sell agreement in your OA puts everyone on notice that the members who wish to remain in the LLC have the right to purchase the selling member’s interest before selling it to anyone else. The members then redistribute the selling member’s rights and obligations among themselves. Executing a detailed OA allows everyone to have an equal opportunity to assert their rights within the LLC as a whole.
Full Transfer: Selling Your Virginia LLC
Including a full transfer clause in your OA is vital to avoiding legal disagreement as well. The prospect of selling all of the assets or the entire LLC might arise. A comprehensive OA will describe the process all members need to follow. Remember that Virginia law applies when the OA fails to address members’ rights when selling the LLC. You may need the written consent of all of the LLC’s members to complete a full transfer unless the OA indicates otherwise.
Other Issues that Could Force You to Transfer LLC Ownership in Virginia
Death of a Member
The death of a member could wreak havoc on the organization — unless you have a comprehensive OA that guides you through this unfortunate event. The goal is to keep the LLC up and running even when you lose a member. A thorough OA will describe the procedure you need to follow so you can stay in business.
Membership in an LLC is a property right. It is not “real property” like real estate. However, it’s descendible, meaning that the member’s benefits, such as a share in the LLC’s profits, transfer to the spouse or children upon the death of a member.
Voting rights don’t transfer upon death to the member’s heirs. Thus, you could have a hard time running the LLC when some voting rights are in limbo. The heirs have no right to assert a management interest in the LLC. An OA that includes a clause allowing the surviving members to buy out the deceased member’s rights from the heirs could avoid this conflict.
Dissolution and Reformation
One member leaving the LLC could create a tremendous hassle for the LLC. Instead of buying out the departing members, dissolving the LLC and reforming is sometimes a better option. This procedure allows any member who wants to recoup their investment to do so. Additionally, new members can invest in the new LLC when reforming the business.
File proper change of ownership paperwork in Virginia
Every time you make member changes in the LLC, you need to file the appropriate paperwork with the Virginia Secretary of State. Failing to do so could result in a dissolution of the LLC and you could lose the legal protections afforded to the LLC’s members.
See how ZenBusiness can help you grow your Virginia LLC today
Having a complete OA is the key to making a transfer of LLC ownership in Virginia smooth. You can draft a well-written and comprehensive Operating Agreement with ZenBusiness’ Operating Agreement template, just one of the many formation and compliance services we offer to help your business succeed.
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, you can, but you need to have the consent of all of the members of the LLC unless your Operating Agreement indicates otherwise.
Can an LLC issue new membership interests?
The Operating Agreement will describe how to add a new membership interest. Virginia law allows your LLC to add a member with a majority vote of all members if you don’t have an OA.
How do I change ownership of an LLC with the IRS?
Speaking with an experienced tax professional is the best way to avoid tax complications. The IRS does not track ownership changes. Notwithstanding, the IRS requires a new employer identification number (EIN) when you reform your LLC.
Can an LLC member have no ownership interest?
No. Membership in an LLC includes ownership rights. Those that receive a distribution right only in the LLC are not full members.