Transferring Ownership of an LLC

Transferring ownership of an LLC is a crucial legal process. And, if you’ve checked your state’s Secretary of State website looking for an “LLC transfer of ownership” form, you might be feeling lost. Lots of states offer guides on how to start an LLC, but not how to change or sell one.

In this guide, we’ll cover all the essentials to transferring LLC ownership, including partial transfers and full transfers.

Can ownership of an LLC be transferred?

Members of an LLC can typically transfer their share of ownership to another person. But selling your portion of an LLC is a bit more complicated than selling shares in a corporation. That’s because ownership rights are carefully governed by an LLC’s operating agreement. And if the LLC doesn’t have an operating agreement in place, the state’s Limited Liability Company Act governs the transfer.

There are two primary types of ownership transfer within an LLC: a partial transfer of one member’s rights or a full transfer of the entire LLC. Each transfer operates a little differently, so let’s start with partial transfers.

How to Transfer Partial LLC Ownership

Typically, in a partial LLC ownership transfer, one member seeks to withdraw from the business. Perhaps they’re retiring, or it’s time for them to pursue a different venture. When that’s the case, only the withdrawing member’s share of the business will change hands. There are five general steps required to do so.

Step 1: Consult your LLC’s legal documents

Check your LLC’s operating agreement. Ideally, when your LLC first started, you created a detailed operating agreement that describes how ownership of the business can change hands. You’ll need to follow the procedures detailed in your operating agreement.

Typically, an operating agreement will have a buy-sell provision that explains how, when, and why a member can sell their share of the business. The buy-sell agreement might even place restrictions on who can buy into the business. Some agreements even give other members the first right of refusal to buy out another member’s ownership portion. The vital thing is that you adhere to your operating agreement when transferring ownership.

The customizable nature of an operating agreement is one of the biggest benefits of an LLC. But it’s meaningless if you don’t adhere to it.

What if I don’t have an operating agreement?

Only five states actually require an LLC to draft an operating agreement. And even though it’s highly recommended to create one anyway, some LLCs choose not to. If you don’t have an operating agreement, your LLC transfer will be completely governed by the default provisions in your state’s limited liability company statutes.

Carefully consult your state’s statutes because every jurisdiction is different. Some states won’t allow a transfer without unanimous consent of the members. Others have specific rules for transferring membership through inheritance. If you don’t adhere to these state rules, you may find yourself facing legal consequences and administrative dissolution.

Step 2: Notify your other members and obtain their agreement

Inform your fellow members that you intend to transfer your ownership and get their approval. Before you can make a sale of your ownership, you should notify your fellow members. Odds are, they’ll want to know who you plan to sell your share to and when you’ll do so. They might even have the first right of refusal, meaning they can have the opportunity to buy your share before someone else does.

Your fellow members typically need to consent to your partial transfer. Getting their approval might take some time and compromise — all governed by your operating agreement — but it’s essential. Be sure to adhere to any overarching rules in your state, too.

Step 3: Determine how much your partial LLC share is worth

Assess the overall value of your business so you can determine how much your portion is worth. Regardless of whether you’re selling your ownership interest to another member or a third party, you’ll want to set a price for it. That means you’ll need to appraise how much the entire LLC is worth.

Once you know that, you can set the value of your ownership interest based on your ownership percentage of the LLC. For example, if you have a 25% share of a four-member LLC and your LLC has an estimated net worth of $200,000, your share is worth $50,000. Your percentage of ownership should be set out in your operating agreement.

Step 4: Draft a sales agreement

Work with your buyer to draft a mutually beneficial contract for the sale. Just like you’d sign a contract to sell a house, you’ll want to have a contract in place to sell your business. Typically your agreement should list how much the ownership interest costs, how payment will be rendered, and other important sale terms.

The sales agreement should also carefully state what new ownership rights the purchasing member will have. For example, the new member might only enjoy distributions from the LLC’s profits but won’t have management responsibilities or other owner titles. Or maybe the purchasing party will have all the same member privileges you did. Again, the operating agreement will likely dictate terms within this sales contract.

Once the contract is signed, your share is officially transferred. But there are a couple last details to take care of.

Step 5: Update your operating agreement and ownership letters

Add your new member(s) to the operating agreement and remove the old ones. You’ll need to make some quick amendments to your operating agreement to reflect the ownership transfer. These amendments should list the name and information of the new member, replacing the departed member. You’ll also want to update their ownership percentage and your management structure if that will be changing at all.

If your LLC uses membership certificates, you should also issue one to the new member and void the old ones.

Step 6: Update your membership information with the appropriate agencies

File paperwork with agencies like the IRS and your Secretary of State to let them know your LLC’s membership has changed. For tax purposes, you might need to obtain a new EIN (Employer Identification Number) if a big enough percentage of the LLC’s ownership changed with the transfer. And, if the identity of your responsible party for federal tax purposes changed, you’ll need to file the Change of Address or Responsible Party form to let them know.

In many states, you’ll also need to notify the Secretary of State of your membership change. Sometimes this entails filing an Amendment to the Articles of Organization. In other states, you’ll update this when you file your annual report or statement of information. Every state approaches this a little differently, so you should consult your local government or a business attorney to learn more.

What about other agencies?

Your LLC’s members might be listed on other important documents, like bank accounts, property titles, and more. If that’s the case, you’ll need to reach out to those groups to amend your listed members.

For example, you might have listed all four of your LLC’s members as authorized users of your business’s checking account. In that case, you’d need to update your bank account to include the new member. You’ll repeat this process for any other accounts or paperwork.

How to Transfer Full Ownership of an LLC

Transferring complete ownership of an LLC looks quite similar to transferring a partial ownership stake; you’ll still need to abide by the procedure set out in your operating agreement (or state statutes). You’ll still need the agreement of your members. But there are a couple key differences.

Determine exactly what’s being sold and its value

If you’re selling the full business, you have some freedom to accept any buy offer that your members agree on (and complies with your operating agreement). But you’ll also want to be sure that you’re all on the same page about what’s being sold. Is the buyer trying to get the whole business? Or do they just want to purchase the business assets?

As long as your operating agreement allows it, your members can agree to either approach. But if you’re only selling the assets and not the business, you’ll want to dissolve your LLC after the sale. But if you sell the whole business, you’ll want to properly transfer ownership and management.

Change your Responsible Party with the IRS

Since the entire membership of your LLC will be changing, it’s guaranteed that your business’s “responsible party” will change for federal tax purposes. You’ll need to complete this step so the IRS knows that the person responsible for the business’s taxes has changed. You may also need to get a new EIN, or Employer Identification Number. 

If your state’s revenue department has a similar form, you’ll need to file that, as well.

Risks with Transferring LLC Ownership

Transferring ownership of your LLC is possible, but it does come with risks, especially if the operating agreement isn’t adhered to. Single-member LLCs tend to be a little simpler, while multi-member LLC transfers require a more complicated process — and they’re more prone to potential issues. Let’s briefly cover a couple of the risks to keep in mind.

Potential for Lawsuits

Let’s say you try to withdraw from a multi-member LLC, but you didn’t adhere to the first right of refusal included in your operating agreement. Your other two business partners don’t see eye-to-eye with the person you sold your share to, and they would have preferred running the business by themselves instead. They’re angry and want to seek damages.

That’s just one hypothetical lawsuit that you and your LLC could face after transferring ownership. We could list others. To avoid pitfalls like this, it’s crucial to adhere to your operating agreement. You might even consult a business attorney to guide you through the process.

Risk of Administrative or Judicial Dissolution

If you don’t properly transfer ownership within your LLC, your state might have grounds to shut down your business by force. For example, if you don’t update your membership information on your annual report or your Articles of Organization, the state might administratively dissolve your LLC until you correct the issue.

Or let’s say you want to leave your ownership share, but your operating agreement doesn’t provide for that partial transfer. In many states, your LLC would technically have to dissolve and reform without you. If you sell your ownership share anyway, the state courts could dissolve your business by force.

Taxable Proceeds for Business Sales

Any income you make as an individual — even from selling your share of a business — is taxable. If you pay taxes appropriately on your sale, it’s a non-issue. But dodging those taxes is a recipe for disaster. Additionally, if you’re anticipating a certain amount of profit from your sale, you’ll want to mentally account for taxes before making too many plans for that revenue.

Tension with Other Members

Hurt feelings and disappointment can well up when it comes time to sell your full business or when one partner leaves. Hopefully, you and your partners can come to a peaceful resolution. But you’ll want to be prepared for potential tension during this process.

We can help!

Running a business compliantly is a challenge, but you don’t have to do it alone. At ZenBusiness, we strive to keep business as simple as possible. Whether you need help drafting your first operating agreement, dissolving and forming a new LLC, or worry-free compliance help, we’ve got your back.

Disclaimer: The content on this page is for information 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.