If you’re looking to sell or move ownership interest in a Wisconsin limited liability company (LLC), you’ll find out that a little pre-planning can go a long way. Unlike corporations with shares that can be bought and sold, LLC ownership is held by members with a vested interest in the business. Because of this, legally transferring ownership interest in an LLC takes a little more work than some expect. Let’s take a look at the most common ways to transfer ownership in an LLC, and how ZenBusiness’s tools can help.
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An Operating Agreement (OA) governs the management rights and obligations of members of a limited liability company. Many states, including Wisconsin, don’t legally require an Operating Agreement in order for the business to operate, but it’s a very important document. Taking the time to draft a detailed OA can help your business run smoothly and prepare for any changes or disputes. An Operating Agreement is specific to your business. Some provisions to consider include:
You may also have provisions that are specific to your industry. Without an Operating Agreement, it’ll be more difficult to determine what to do if controversy or procedural questions arise. In the absence of an OA that includes specific transfer provisions, state law will be applied. If you haven’t drafted a Wisconsin LLC Operating Agreement, ZenBusiness has Operating Agreement templates to help you draft one that fits your business’s needs.
In some states, LLC transfer of ownership can cause dissolution of the business. There are two ways to transfer ownership without dissolution. Partial transfers involve one single member transferring their ownership interest to another person. Wisconsin uses the term “assign” to mean one member transferring ownership. The second method is a full transfer. This involves selling the LLC, which effectively transfers the ownership interest of all members.
If one member of an LLC wants to assign their interest to another person, all other members must agree to transfer. Limited liability companies often have OA provisions for “first right of refusal.” This means that the current members are given the opportunity to buy out the assigning member’s interest if they choose to, rather than have it assigned to a third party.
According to Wisconsin law, when a member assigns their interest to a third party, that assignee isn’t entitled to management and decision-making rights. They are only entitled to an interest in profit and loss distribution. They won’t receive full membership rights unless approved by all existing members. The best way to ensure that partial LLC transfer of ownership goes the way you want them to is to have this provision set up in your OA.
A buyer may choose to purchase the entire limited liability company or just the assets. Either way, the agreement needs to be approved by all members of the LLC. Buying and selling a business is a complex process.
The only thing that you can count on in life is death and taxes. Prepare for both. Ideally, your Operating Agreement will serve as a “catch-all” for looking ahead to potential issues. Here are some that you may come across.
A deceased member’s limited liability company interest is treated as part of the estate. The heirs are entitled to distributions but don’t receive management rights. In many situations, existing members will opt to buy out the interest from the heirs.
Depending on the unique circumstances of your limited liability company, it may be easier to dissolve the company and reform as a new business. This could be a good option depending on the financial health of the company, industry projections, member morale, and other factors. All members must approve the dissolution. Remember to file your Articles of Dissolution form 510 with the Wisconsin Department of Financial Institutions. Failure to properly dissolve the limited liability company could result in fines and penalties associated with annual reporting.
The Wisconsin Department of Financial Institutions does record limited liability members, so there’s no need for additional paperwork with the state. You do need to update the information in the company Operating Agreement.
Transferring LLC ownership in Wisconsin can be a bit confusing. Having an established Operating Agreement reduces the stress of trying to interpret statutes and debate with other members. The more detailed you are in your OA, the less grief you will have when it comes to LLC transfer of ownership. If you haven’t drafted your Operating Agreement, check out the ZenBusiness OA drafting tool to make the process a lot simpler.
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.
Interest in a limited liability company may be assigned (sold) to another person. The transfer must have the consent of all current members. The assignee will only have a right to profit and loss distribution, but not management decisions.
Issuance of new LLC membership interests will dilute the interest percentage of all current members. The new members will need to add specialized skills or industry experience to the mix for the new interest creation to benefit the company as a whole. All members must approve of the additional interest.
It is important to inform the IRS of ownership changes. Complete Form 8822-B within 60 days of the transfer.
A person can hold a financial interest in a limited liability company and have no management rights. These individuals receive profit and loss distributions according to their financial interest.
Wisconsin Business Resources