How to Change Ownership of a Limited Liability Company

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Ownership of a limited liability company can partially change when one or more members sell their shares. Ownership can also change entirely when the current members agree to transfer the LLC along with its assets and liabilities to new owners. This is often called a bulk sale.

Partial Ownership Changes

With a Buyout Agreement

Most LLC operating agreements include buyout provisions. In a partial ownership change, the members follow the legally-binding buyout procedures stipulated in the operating agreement. For example, the agreement may specify that two-thirds of the current members have to agree to admit new members.

Without a Buyout Agreement

When the members agree that new members should be admitted and there's no buyout agreement, they may have to devise those procedures ad hoc, then vote to incorporate them in the operating agreement.

The situation becomes more complicated when there is no buyout procedure and a member wants to leave the LLC. Your state's rules of judicial dissolution may eventually apply because a member always has the right to call for the LLC's dissolution. State law in California, for example, names "deadlocked management" or management that is "mired in internal dissension" as grounds for judicial dissolution.

Entire Ownership Changes

With Stipulated Terms

In most states, a majority of owners must authorize the bulk sale unless the operating agreement stipulates otherwise. In some, New Jersey for example, bulk sales of LLCs must be registered with the state. In almost every state, the sellers must notify any creditors of a bulk sale, usually with some advance notice. To find out more about your state's laws on buyouts and bulk sales, consult the Office of the Secretary of State. Most are available online.

Sales of larger companies will normally require drafting a detailed sales agreement similar to this example provided by the U.S. Securities and Exchange Commission. Smaller companies may have relatively simple sales agreements drawn up by buyers and sellers.

When the Operating Agreement Has No Provision for a Bulk Sale

In this case, the required majority of members must agree on a sales price and the terms of sale. This may not be easy because, among other reasons, each member may have a different tax basis. Writing for the American Bar Association's, Business Law Today, Attorneys L. Andrew Immerman and Joseph C. Mandarino note that the sale may have negligible tax consequences for some members and considerable tax consequences for others. In some instances, as they note, short-term capital gains taxes, which have tax rates identical to ordinary income rates, can become due on portions of the buy-out's proceeds. Not every members' interest gets the same capital gains treatment.

If the members cannot agree on a sales price and terms, the available remedy is judicial dissolution.

Tip

  • Attorney Brice Johnson notes that in his experience, most threats of judicial dissolution don't reach court. It is, he believes, an "unnecessary, time consuming and expensive affair" that members should work to avoid.

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