Transferring ownership interest in a Limited Liability Company (LLC) may seem like a straightforward process.
But you need to be careful! The proceedings can easily be sidetracked by anything going back to the original company formation. And if that happens you may end up missing out on opportunities. Even worse, you could lose the protections that you wanted the LLC for in the first place. All while spending unnecessary time in paperwork hell.
So how do you safely and easily transfer the owner the ownership of an LLC? I came up with a few simple steps. Check them out below!
Step 1: Identify the Transaction Process
The first thing you want to do is identify what type of transfer process is appropriate in your particular case. There are several reasons for transferring ownership. They can be put into two core categories.
Whether you’re adding new members or losing existing ones, changes to the LLC’s membership must look to your company’s buy-sell agreement or buyout provisions. Both terms refer to the same concept: a set of guidelines for how to transfer ownership interest within the company.
If this is your objective, then skip down the page to step #2 where we talk about operating agreements.
Selling the Business
Preparing for an acquisition is much more complex and requires a good understanding of legal and fiscal options. You can draft the initial sale agreement in a memorandum of understanding or term sheet. However you will need to follow-up with a formal contract of sale. For this type of process, it’s always a good idea to consult a lawyer who specializes in buying and selling LLCs.
Step 2: Abide By Legal Requirements
Next, you need to look at the legal and operational requirements to execute the transfer. It’s important to abide by external law as well as internal policy. Let’s take a quick look at how both of these can affect your business transfer.
The Operating Agreement
Members of an LLC generally sign a binding contract called an operating agreement. This document specifies the way a company will operate and covers various aspects of business processes. Including buy-sell contracts and buyout provisions.
It’s essential to determine whether your company has an operating agreement. If it does, you should find out whether it has any guidelines or requirements for transferring ownership.
Laws Of The Company’s Home State
Limited Liability Companies are entities of the state in which they were formed. Which means they’re subject to state laws. Each state takes its own unique stance on business law. Some are lenient, others not so much. You can read about my advice on which to form an LLC here.
Spend some time looking through the governing state’s laws regarding your LLC. Take notes related to any restrictions or requirements you may need to follow. It’s also a good idea to make sure the operating agreement proceedings fall in line with state statute. If you’re lost, get an attorney with experience in entity formation and similar transactions to help. Being a great investor doesn’t mean you can also be your own lawyer.
State LLC law is complex. You can view a this example of Texas’s LLC laws if you want to know my pain.
Quick Recap: Follow Instructions and Get Help
If you’re interested in transferring ownership or membership of your Limited Liability Company, make sure to read your operating agreement, buyout provisions, and state legislation.
And if you want to sell your company or are considering purchasing a business, then you should consult a legal expert to make sure your transfer goes smoothly. Royal Legal Solutions offers full-service LLC and (S)LLC formation. This means, we can help you transfer ownership while you get back to what you do best: running your business. Reach out for your LLC transfer consultation today.