For a variety of reasons, one or more members of a limited liability company (LLC) may desire to leave the LLC. This is harder than other business types for the simple reason that in an LLC, ownership vests directly with the members. Compare this with a corporation, where ownership vests in stocks that shareholders can buy and sell freely. LLC members cannot simply share their interest in this manner, due in part to the lack of formalities for that kind of transfer. But, of course, that doesn’t mean there isn’t a way to transfer LLC ownership in Washington.
For more information about LLC formation, check out our Washington LLC Formation page. Read on to learn more about transferring LLC ownership interest, and how our formation and compliance services can help you build the business you want.
An Operating Agreement (OA) describes the details of how to run the LLC. Operating Agreements typically include provisions covering the members’ responsibilities, compensation, and ownership interest.
Few jurisdictions require filing an Operating Agreement at the time the LLC forms, and Washington is no exception. But even if it isn’t legally required, having one is a very good idea. If your LLC has an OA, that’s the first place to look for information about how and when you can transfer a member’s ownership interest. When the LLC doesn’t have an OA, state law will provide some basic provisions. However, they may not provide as much flexibility as an OA might. If you’re ready to put together an OA for your LLC but don’t know where to start, our Operating Agreement template can help.
Regardless of whether your LLC has an OA or not, dissolving and reforming the LLC is one option for transferring ownership. However, there are two less severe options that are generally accepted: the partial sale or “buyout,” and the full entity sale.
In a buyout situation, one or more members make a deal to “buy out” the interest of other members who no longer wish to be part of the LLC. After the transfer, the remaining members split the purchased interest among themselves.
Buyouts typically involve a legal contract called a “buy-sell agreement” to help the process go smoothly. Like other sale contracts, the buy-sell agreement makes sure each party’s rights and responsibilities are clear during the ownership transfer. In addition to the agreement, a well-drafted OA will have instructions for the buyout as well. Keep in mind that some jurisdictions may limit the use of buy-sell agreements if the LLC doesn’t have an OA.
Whatever the situation, having an OA is generally a good idea. Having a detailed and comprehensive document you can refer to can help reduce in-fighting and give all members equal opportunity to assert their rights within the LLC.
Whereas a buyout involves selling an ownership interest within the LLC, a full transfer involves selling the LLC itself to a third party. You may be selling the LLC and all its assets, or just the business entity itself. In either case, a well-drafted OA will once again provide useful guidelines on how the sale can take place. Also, note that typically, a full sale can only happen if all members consent to the sale.
Outside of a full or partial transfer, there are a few other relatively common situations that may involve an ownership transfer.
When an LLC member dies, their interest transfers to their heirs (like a spouse or child). That heir won’t have any right to assert control over the LLC, but they will be entitled to some benefits or compensation linked to their interest. To avoid conflicts, members may choose to buy out the deceased member’s heirs and return that interest to the LLC.
As mentioned above, totally dissolving and reforming the corporation is another way to transfer ownership. This process undoes the LLC’s formation. It allows anyone who wants to cash in on their investment to do so, and allows others to reform the LLC and start over. As a result, dissolution and reformation also allows new members to join easily.
If ownership does change in your LLC, you need to file the proper paperwork to report the change. For information about fees and forms for Washington limited liability companies, visit the Washington Secretary of State website at sos.wa.gov.
Although transferring an LLC isn’t always the most straightforward process, it’s possible. Knowing what the OA says about an ownership transfer is key to making the transition smooth. If you’re interested in drafting your own Operating Agreement, our Operating Agreement template can help you get started. If you want to take a closer look at all of the tools and services we offer, check out our full slate of formation and legal compliance services.
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. If you have an ownership interest in an LLC as a member, you may sell it as long as all other members agree. Any transfer must follow the rules established by the LLC’s Operating Agreement or state law.
Yes. An LLC is not restricted to the members it has when it forms. However, new members can only join the LLC if each of the existing members consents to the addition of the new member.
The IRS doesn’t necessarily require a report on the change of ownership to the LLC unless the change results in a new “responsible party.” A responsible party is the person controlling or managing the LLC and the disposition of its funds and assets. For more information about reporting a change in the responsible party, visit irs.gov.
No. By definition, an LLC member is a person with an ownership interest in the LLC. However, members do not necessarily have to exercise control in the LLC on a day-to-day basis. Some members may have an ownership interest while allowing other members to run the LLC.
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