June 18th, 2021
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June 18th, 2021
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4.7 - 6 votes
A limited liability company, or LLC, is an attractive form of business for many individuals and small companies. This is because a limited liability company allows for the possibility of rapid growth, while ensuring the owners of the LLC remain protected from personal liability. This type of protection from liability can be especially critical for businesses that operate in a consumer-facing manner, such as those that sell consumer products or even restaurants.
The LLC business structure also usually doesn't have a lot of formal rules at the state level, like a corporation would. This allows the owners the space they need to set up the business exactly as they prefer. If you'd like to read more about how to form an LLC, check out our guide, "How to Form an LLC."
People that own a percentage in an LLC are usually called members. Members generally govern the LLC, or they make the decisions about who will govern the LLC, such as hiring managers. These things are outlined in an LLC's Articles of Organization, its primary formation document. To read more about that, check out our guide "What are Articles of Organization for an LLC?"
If you own a percentage in a limited liability company (also called owning an interest), there are many reasons you may wish to sell. For example, perhaps you never intended to remain a part of the LLC forever. Or, perhaps you did, but you are in need of funds and selling your interest in the business would allow you to make some fast cash. This can be especially true if the business is successful.
If the LLC you are involved in is a small one, such as, for example, less than five members, you may not know a lot about how the process of sale works. In this guide, we'll discuss everything you need to know to effectively sell your percentage in an LLC.
By the time you've finished reading, you'll be in great shape to sell your interest as needed.
Please keep in mind that nothing in this guide constitutes legal advice, and it should instead be taken as informational only.
Although it may seem like a no-brainer, the first thing you should do is talk to the other members. This is especially important if the LLC is a small LLC, such as one that is run by family or friends. Although it may be tempting to wait until you have a buyer in place and everything is set to go, it's a better idea to keep the other members of the LLC informed about your plans so they are not blindsided when you show up with a new member and a fully executed purchase agreement.
If you want to maintain relationships with the other LLC members after your departure, this becomes even more important. Regardless, though, it is just good business sense not to overwhelm your business partners with a surprise change in ownership.
Final takeaway: Be sure to speak with the other members as soon as you decide to sell your interest.
Of course, the next thing you will have to do is find a buyer! Selling an LLC isn't like selling a consumer good. In some cases, you may have to offer the percentage to current members first. In other cases, you may be free to bring in a new buyer, but you'll have to find someone who wants to join a business like the one you are leaving.
It can help to speak to other business owners, especially if the LLC is primarily for the purposes of investment.
Final takeaway: Find a buyer for your percentage after you speak to the other members.
Although you may end up not needing an attorney's assistance, especially if it is a small LLC with relatively simple documents, it is not a bad idea to consult with one that specializes in small business. Many small business attorneys offer free initial consultations and in this consultation, you might be able to understand whether you should hire a lawyer. Conversely, you might receive the reassurance you need to undertake the sale yourself, but either way, the consultation will be helpful and valuable.
Final takeaway: Speak to an attorney early on to understand what you need to do for the sale.
The Operating Agreement is the document that is going to give you the most insight on the steps you need to take to finalize the sale. An Operating Agreement covers everything related to the operation of the LLC, including what happens when a member wishes to voluntarily leave and relinquish their interest.
The Operating Agreement will tell you whether you need to offer the interest to other members first, and if there are any other specific requirements on you, such as how the valuation of the interest should be done.
Additionally, if you'd like to read more about the two main formation documents of an LLC, check out our guide, "What is the Difference Between Articles of Organization for an LLC and an LLC Operating Agreement?"
Final takeaway: Review the Operating Agreement in-depth to ensure that you are proceeding according to its terms.
If the Operating Agreement is silent, you may need to look into your state laws to determine whether there are any requirements on you in selling your LLC percentage. This is unlikely though, as most LLCs have a robust Operating Agreement that will outline the necessary steps for sale.
Final takeaway: If needed, look into state laws regarding the sale of interest in an LLC.
Follow the steps outlined in the Operating Agreement to get authorization for the new member. If you have decided to sell your percentage to an existing LLC member, this may not apply, but you still may need to get authorization for that member's share of ownership to increase. Some Operating Agreements require the unanimous consent of all the members to authorize someone new; others require just a majority. Regardless, make sure you follow the particular steps required by your LLC.
Final takeaway: Get proper authorization for the new member.
As mentioned above, some LLCs are managed by the owners, also called member-managed LLCs. Some LLCs are managed by managers who are hired by the owners, called manager-managed LLCs. The Operating Agreement will be clear about which LLC structure is relevant to your LLC. Before you complete the sale, make sure the incoming member understands the governing structure and knows what to expect.
Final takeaway: Inform the new member about the management structure of the LLC.
The Operating Agreement will likely say how a purchase price for the sale should be determined. Often, there are specific valuation steps. They might include getting an external party to value the net worth of the LLC so that a price for individual interests can be determined. Follow all the steps outlined in the Operating Agreement to establish a purchase price.
Final takeaway: Get a valuation, if needed, to determine a purchase price.
To sell your membership officially, you'll need to draft and execute an LLC Membership Purchase Agreement. These are generally short, relatively simple documents that just spell out the terms of the sale and interest transfer. They are executed by both the buyer and seller of the interest. The LLC will likely want to maintain a copy for their records. You may also need to fill out an LLC Membership Interest Assignment to fully transfer the interest. An LLC Membership Purchase Agreement will cover all the details of the sale, including the actual price, whereas the LLC Membership Interest Assignment will be the document that simply transfers the interest from one party to the other, in an official, written form.
It is possible to simply transfer interest in an LLC without doing a sale (for example, donating your interest), but this situation is generally fairly unlikely. Even if you do give away your interest, you will still need to take the other steps outlined here to ensure that the transfer of interest is okay with the other LLC members.
Final takeaway: Fill out and sign a purchase agreement to complete the sale.
The LLC's Operating Agreement will likely contain information about the names, addresses, and interests of the current LLC members. Now that there has been a change, make sure the Operating Agreement gets updated to remove your name and update it to include the new member's information.
Final takeaway: Add the new member to the Operating Agreement.
The capital accounts ledger contains information about the contributions members make to the LLC, as well as the distributions they receive. The new member will need to be added so that the LLC's finances can remain accurate.
Final takeaway: Add the new member to the capital accounts ledger.
In some states, you may need to file something with the Secretary of State to alert the government to the change in membership. After all, a change in membership is a change in ownership for an LLC. This will not be the case in all states, though, so make sure you check your local laws and speak to an attorney if needed.
Final takeaway: If your state requires it, update them with the new member's information.
Selling your interest in an LLC is not complicated, but it can be a detailed process. It's likely that your LLC's governing documents will have many of the answers you need, but you may wish to speak to a licensed attorney in your state before you complete the sale. Either way, ensure that you've made all of the required changes to the LLC's documents before your departure as member.
About the Author: Anjali Nowakowski is a Legal Templates Programmer at Wonder.Legal and is based in the U.S.A.