How To Transfer LLC Ownership (2024 Guide)

When you transfer ownership of an LLC, it can be a partial transfer or full transfer. Partial transfers—where only a portion of the LLC is being sold—are generally simpler as the process is typically defined in the operating agreement at the formation of the business.

Full transfers are a bit more complicated. You have to negotiate and define exactly what is being purchased—for example, a buyer might only be interested in the assets owned by the LLC instead of the business itself—come to a consensus with the buyers and other members and draft a buy-sell agreement with the buyers. There are also some heavy-duty legal and tax ramifications that owners might need help dealing with.

When it comes to transferring partial LLC ownership, the process is usually defined in the operating agreement. An operating agreement lays out the framework of your LLC on paper. It lists the business’s name and purpose, tax status, owners—called members in an LLC—and their percentage of ownership, the management structure of the business, its operating procedures and the buy-sell agreement.

That last one—the buy-sell agreement—is a key component of the process.

Buy-sell Agreements

Most LLC operating agreements include a buy-sell agreement and other language relating to the transferability of LLC membership interests. A buy-sell agreement is a contract among the LLC’s owners that defines the conditions for selling shares of the LLC. More specifically, it spells out which events can trigger a sale, who can purchase membership interests, a method for determining the value of those interests being sold and how to fund the sale. So. when you want to transfer LLC ownership—even before you spend one minute negotiating—the buy-sell agreement is the first place you should look.

Typically, the buy-sell agreement will define what to do if an LLC member dies, gets divorced, goes bankrupt, becomes disabled or wants to retire. But each business is unique, so you may require additional provisions to suit your needs.

In a small business, it’s common for buy-sell agreements to dictate that members purchase life insurance policies against all other members, so they can use the insurance payout to fund the purchase of interests from the deceased partner’s estate. It’s also common to set aside a percentage of profits each year to fund the purchase of another owner’s shares should a triggering event occur.

The buy-sell agreement can also dictate who can buy an interest in the company and whether the purchase must be approved by the LLC membership. It can allow or prevent outsiders or at least give priority to existing members before taking bids from outsiders.

Transferring Partial LLC Ownership Without an Operating Agreement

A buy-sell agreement is usually included in the operating agreement, although it can exist independently. As with an operating agreement, there is no requirement to create a buy/sell agreement when forming the business.

In absence of a buy-sell agreement, you can add one to your operating agreement by drafting the amendment and voting on it. You can also follow any transfer provisions contained in your state’s LLC laws. A final option is to dissolve the LLC and reform it.

When the process for transferring LLC ownership is not defined in the operating or buy-sell agreement drafted at the formation of your company, you’ll need to negotiate terms with the buyer, and come to a consensus with the other LLC members—as spelled out in your operating agreement—and then draft an agreement for the sale of an LLC interest. You will need to include details about what is being purchased in the sale, price and payment schedule. It’s a good idea to have a lawyer draft this agreement to make sure it includes all the necessary language.

If you have a change in LLC members, you’ll usually need to amend the articles of organization on file with the state to provide the name of new members and remove old ones. You may also need to issue a new membership certificate to the new owner. You’ll also want to amend your operating agreement to reflect the contributions, rights and ownership percentage of the new owner.

It doesn’t matter if you’re selling a small portion of your LLC or the entire thing—you’ll have to inform the secretary of state where you operate as well as the IRS and banks and financial institutions that you work with. The paperwork that needs to be filed with the secretary of state is noted above, so the following are the details that you need to provide to the IRS, your bank or financial services providers and other entities you might need to inform.

Depending on the conditions of the sale, you may need to apply for a new employer identification number (EIN). You may also need to file Form 8822-B to change the “responsible party”, as the owners exiting the business may have served that role.

There isn’t a formal form for informing your bank as there is with the IRS. But you may need to make changes to the list of people who are authorized to conduct transactions on the business’s behalf. You may also want to notify customers and vendors of the change in your ownership.

Bottom Line

Transferring LLC ownership might not appear to be an overly complicated process, but it’s not one you want to handle on your own without the help of legal and tax experts. There are tax implications and legal pitfalls that, if not navigated properly, can cost you time and money and be the source of incredible stress. Additionally, the terms you will negotiate can get quite complicated, which might require a lawyer’s touch.

Therefore, we highly recommend that you work with legal and tax experts when transferring LLC ownership.