Step-by Step: How to Change Your LLC’s Ownership

One or more people or a legally formed business can own and run an LLC. Over time, though, they may transfer their stake in the LLC to another person or business.

Some give up their ownership when setting up a trust, while others do so as they sell their businesses. In any of these cases, knowing how to change an LLC’s ownership is important to its continuity. We discuss this process below.

Key Takeaways

• Before transferring your LLC’s ownership to another person or business, review its operating agreement and buy-sell agreement.
• You should also determine the value of each member’s stake in the LLC. This can be done using specific valuation methods.
• After conducting valuation and obtaining member approval, you can look for interested buyers and draft a sales agreement.
• LLC ownership changes require amendments to its information. All 50 states have amendment forms that you can file to notify authorities of ownership changes.
• Once the transfer is completed, you should:
  • Update your operating agreement.
  • Maintain all necessary documents.
  • File an amended annual report.
  • Notify regulatory agencies and stakeholders.
  • Update your LLC’s information with financial institutions.
  • Introduce the business to its new owners.

Review Your LLC’s Operating Agreement

Ownership transfers start with a thorough review of your LLC’s operating agreement. This document should outline how the process works, including whether it needs member approvals.

If you change your LLC’s ownership without an operating agreement, you may face significant challenges during the process. We’ve shared how to write an LLC operating agreement on our blog.

Review Your Buy-Sell Agreement

A buy-sell agreement can be a stand-alone document or a section in your LLC’s operating agreement. It describes how and when a member can leave the business and how their ownership interest will be handled.

Generally, your buy-sell agreement can include the following information about ownership transfers.

• Possible reasons for transferring LLC ownership
• Valuation methods
• The people who can buy the departing member’s interest

The document should also be well-written for fewer disputes and smooth ownership changes.

Bonus Tip

Want to learn more about buy-sell agreements? Watch the 60 Second Business Tips video below.

What Happens If There’s No Buy-Sell Agreement?

If your LLC hasn’t drafted a buy-sell agreement for ownership transfers, it must follow applicable state laws. This rule also applies to LLCs without an operating agreement.

Determine the Value of LLC Ownership Interests

Before fully transferring your LLC’s ownership to a third party, be sure to determine the value of all stakes in the business. This way, you understand how ownership changes affect the taxes imposed on gifts.

Here’s a short list of the most commonly used valuation methods for LLC ownership interests.

When reviewing your operating agreement, see if it contains clear rules for the valuation process. This will help prevent future disputes and give the buyers and sellers certainty during the transfer.

Negotiate with Interested Buyers

Suppose you’ve gained member approval for an ownership change and determined the value of your ownership interests. What you need to do now is to find buyers and discuss the sale with them.

Typically, most businesses consult financial advisors, legal experts, or business specialists during a sale. With their expertise, your LLC can pursue the best opportunities and increase its value while staying compliant with all applicable rules and regulations.

Get Expert Help from NCH’s Business Specialists

Draft a Sales Agreement

If your potential buyer agrees to purchase a stake in your LLC, formalize their decision through a sales agreement. The document should include the key details listed below.

• The names of the buyer(s) and the seller(s)
• The percentage or amount of ownership interest given to the buyer(s)
• The price of the interest and specific payment terms (how and when it will be paid)
• The effective date of the ownership transfer
• Declarations about the state of the business and the legal standing of both parties
• Clauses specifying who’s liable for potential legal issues or violations of the agreement
• The laws governing the sales agreement

File an Ownership Amendment with Your State

While LLCs don’t necessarily need state approval for ownership changes, they’re required to file an appropriate amendment. Filing fees for ownership-related amendments vary by state.

Compliance Update

In Nevada, you must file a Certificate of Amendment for ownership changes. The filing fee costs $175.

How to File an Ownership Amendment Form

To file an ownership amendment form:

1. Get the required document from your Secretary of State or equivalent department’s website.
2. Provide the necessary information about your LLC’s ownership change.
3. Pay the filing fee using your chosen payment method. Credit cards are accepted for online filings.
4. Submit the form. This step can be done online, by mail, or in person.

What to Do After Transferring Your LLC’s Ownership

After transferring your LLC’s ownership to a buyer, be sure to take the following steps.

Update Your Operating Agreement

Your revised operating agreement should detail adjusted ownership interest percentages, member responsibilities under the new owners, and the new management’s voting rights. They must be updated whenever you add partners to your LLC.

Keep Other Documents Related to the Transfer

Along with your operating agreement, keep copies of other documents related to the ownership transfer. These papers include your sales agreement and membership certificates and records. Cancel old certificates and issue new ones with updated ownership percentages.

File an Amended Annual Report

LLCs are typically required to file annual reports that list their current members and managers. As part of LLC maintenance, consider filing an amended document to inform your state about your business changing its ownership. Non-compliance can lead to penalties or loss of good standing.

Notify Federal, State, & Local Authorities

You should also notify federal, state, and local authorities of ownership changes. For instance, filing IRS Form 8822-B (Change of Address or Responsible Party – Business) gives the agency information about your LLC’s new owners.

Update Business Information with Financial Institutions

Remember to update your LLC’s information with financial institutions as well. Changing an LLC’s address or members can involve getting new signature cards, updating account authorizations, or submitting amended formation documents to banks, lenders, and credit bureaus.

Notify Your Stakeholders

Ownership changes affect your relationships with employees, customers, vendors, and other stakeholders. Make sure they’re informed about the transfer of ownership immediately to prevent potential problems. Contact each stakeholder or share an update on your social media profiles or official website.

Introduce Your LLC to Its New Owners

As your last step after transferring your LLC’s ownership, educate the new owners about the business. Provide them with information about key processes, relationships, and other aspects of your operations. This will help the new owners understand how the company conducts business.

Frequently Asked Questions

Can I transfer an LLC’s ownership without amending its operating agreement?

We advise against transferring an LLC’s ownership without updating its operating agreement. Otherwise, you may face legal challenges and compliance issues. An LLC’s operating agreement governs ownership changes and details how they were conducted.

How long do LLC ownership transfers take to complete?

In general, LLC ownership transfers take some time to complete. If ownership interests are transferred internally, it may be done within several days to weeks. More complicated transactions can take longer to complete.

What happens to existing contracts when my LLC’s ownership changes?

Existing contracts should remain valid even if your LLC’s ownership changes. But to prevent problems, notify the involved parties immediately. You may also need to revise your contracts to include information about your company’s new owners.

Do ownership transfers cause LLCs to dissolve?

No, ownership transfers don’t necessarily cause LLCs to dissolve. They’re done for several reasons, including an owner’s retirement, incapacitation, or death. LLCs can be dissolved if they face financial difficulties, member disputes, or want to restructure their operations.

Can I sell my LLC to another person or business?

Yes, you can sell your LLC to another person or business. However, the sale needs member approval. After that, you must update your company’s documents and amend its legal filings. Make sure to address the tax and financial obligations associated with the sale as well.

Do I need a lawyer’s help to complete an ownership transfer?

Yes, you’ll need a lawyer’s help to complete an ownership transfer. They’ll help you draft the necessary documents and stay compliant with applicable laws throughout the process.

More importantly, you should sign your sales agreement with an attorney present.

Do ownership transfers add new members to an LLC?

Ownership transfers don’t add new members to an LLC. Instead, they usually happen when the original owner(s) give their stake in the business to another person or company. As a result, they leave the LLC altogether.

Can I give my ownership interest to a family member as a gift?

Yes, you can give your ownership interest to a family member as a gift. However, this move may significantly impact your tax obligations. It needs proper valuation and documentation to keep your LLC legally compliant.

Expert Tips From NCH

1. Document the entire transfer process. Write all important information about your LLC’s ownership and save the detailed records for future transactions and compliance purposes.
2. Provide buyers with complete financial records, including tax returns, financial statements, and cash flow projections. This information helps them understand your LLC’s current financial position.
3. Draft comprehensive representations, warranties, and indemnities in your purchase agreement. They protect both parties by fully disclosing the LLC’s financial health, legal standing, and operational status.
4. Include clear termination and dispute resolution procedures in your sales agreements. Well-drafted agreements state potential problems and provide solutions before conflicts happen.
5. Create a comprehensive due diligence checklist that covers your LLC’s financial, legal, and operational standing. Use it to prevent oversights and ensure a smooth transfer of ownership.

Change Your LLC’s Ownership Without Issues

Ownership transfers are one of the most challenging tasks for LLC owners. After all, the process takes considerable time and effort. Knowing how ownership transfers work makes them less overwhelming and helps you ensure that your business remains successful with new owners at the helm.

If you’re considering transferring your LLC’s ownership, NCH can discuss its potential benefits and drawbacks with you.

Contact Us Today for Expert Advice

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.