Limited liability companies (LLCs) often receive praise for their flexibility and simplicity compared to other business structures. With that in mind, you may be surprised to realize that transferring ownership in an LLC is actually somewhat complex.
This is because LLC ownership vests directly with the LLC’s members, rather than in some kind of exchangeable asset. For example, in a corporation, ownership vests in stocks that shareholders can freely buy and sell. LLC members, however, don’t have this freedom. They can only transfer their ownership according to specific rules. If you’re interested in learning more about West Virginia LLC formation, visit our West Virginia LLC Formation page.
An Operating Agreement (OA) is a special agreement that includes details about the rights, powers, and responsibilities of the LLC’s members. Members typically use OAs to lay out procedures for how they want to run the LLC. Importantly, the OA also usually contains information about the process for transferring ownership in a variety of circumstances.
Although many jurisdictions permit LLCs to operate without an OA, putting one in place is a sensible course of action. Having an OA helps remove some of the ambiguity about what to do in uncommon or unexpected situations. Although state laws take over when no OA is present, they likely won’t be as in-depth or beneficial as an OA custom-drafted for your particular business needs. Want to draft an OA but don’t know where to start? We can help get you started with a West Virginia Operating Agreement template.
Whether or not your LLC has an OA, there are generally two main options for transferring ownership of your company. The first is executing a buyout and the second is selling the entire business entity.
A “buyout” is a specific process that allows certain members of an LLC to “buy out” other members. In most cases, the OA establishes when a buyout should occur. At that point, the buyout works by allowing one or more members to purchase the ownership interest from other members who no longer wish to be part of the LLC. The remaining members then divide the purchased interest among themselves and continue running the LLC.
To execute a buyout properly, LLC members often use a contract called a buy/sell agreement. Some jurisdictions require an OA to be in place before you can use a buy-sell agreement, but this isn’t universally true. It’s important to check local laws in your area to make sure a buy/sell agreement is allowed if you don’t have an OA.
As you might imagine, a buyout can cause disagreements between an LLC’s members. If that happens, having a comprehensive OA in place can help reduce potential issues by giving everyone an equal opportunity to exercise their rights within the LLC.
The second major option for transferring ownership is to sell the entire LLC. In a full transfer, all members consent to the sale of the LLC itself to a third party — often along with all assets that belong to the company. As before, an OA should explain the procedure to make sure the members receive what they deserve.
Both partial and full transfers can be fairly complex, but full transfers are especially so because of the number of additional assets involved.
Transferring ownership in a West Virginia LLC isn’t the only scenario an OA can help with. There are other events in the life of an LLC that your well-drafted OA may provide assistance with as well.
The unexpected passing of a member can be quite a shake-up for the remaining members. This is because the deceased member’s heirs receive the member’s ownership interest. Although that heir, like a spouse or child, won’t have any right to exercise control over the LLC, they’ll still have a measurable interest in the LLC entitling them to certain benefits. An LLC’s members may negotiate to buy out this interest to avoid future complications.
Dissolving an LLC — essentially, undoing its formation — is a drastic step that members undertake only when absolutely necessary. However, when it happens, it gives everyone involved a fresh start. Existing members can choose to cash in on their contributions and walk away from the venture, or put their money back in and form the LLC anew. If the LLC rises again, reformation also provides the option for new members to join.
In addition to annual reports, most jurisdictions (including West Virginia) require you to file a report with the Secretary of State after changes in ownership occur. For specific information on what forms to file and where, you can check out West Virginia business portal at wv.gov.
As you can see, transferring ownership in a West Virginia LLC isn’t quite as straightforward as you might expect. Luckily, with proper planning and a solid OA, you can reduce the headache of an ownership transfer at least a bit. Need an OA but you’re not sure where to start? ZenBusiness has you covered with an affordable West Virginia Operating Agreement template, but we also have a full range of business formation and compliance services to make your job a little easier.
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. All members in an LLC have an ownership interest that they can sell to the other members (or a third party in some situations). The important thing is to follow the rules provided in your LLC’s Operating Agreement, or else these transfers must have unanimous approval from the rest of the LLC’s members.
Yes. New members can split their collective interest to allow a new member to join. However, new members can only join with the unanimous consent of the LLC’s existing members.
While state-level authorities like the West Virginia Secretary of State require notice of change of ownership, the IRS doesn’t — at least, not always. When you obtain your employer identification number (EIN), the IRS requires you to designate a “responsible party.” If this person leaves or someone else becomes the responsible party, that’s when the IRS requires notice. More information about reporting a change in the responsible party can be found at irs.gov.
No. Participants in an LLC who don’t have an ownership interest are not considered members. Conversely, all members of an LLC must have an ownership interest. However, having an ownership interest doesn’t necessarily require constant participation in the LLC.