Starting an LLC is an exciting adventure and one that brings with it a lot of opportunities along with a healthy dose of positive stress. Whether you started your business with the intention of running it for life or if the goal was to reach profitability and then market it to a larger organization, there may come a time when you wish to hang up your hat and sell your LLC or perhaps your share of an LLC to another buyer.
In this guide, we'll walk through the reasons why you may wish to sell and how to transfer full or partial LLC ownership to another party, as well as the steps and legal requirements for an LLC transfer of ownership.
Why Would You Need to Initiate an LLC Transfer of Ownership?
Selling your LLC, either in full or in part, isn't always an easy decision, and there are many different reasons why you might consider it. From retirement and family changes to geographical relocation and profit potential, businesses change hands all the time. In fact, many startups begin with a mission to sell once they become profitable and have been noticed by larger organizations with aligning goals and audiences.
According to a 2022 study conducted by BizBuySell, the number of businesses up for sale in the first quarter of 2022 was up 24 percent compared to 2021. The majority of study respondents claimed that their main reason was retirement, though 31 percent said that while their businesses were operating successfully, they believed that selling opened up the opportunity to fetch a good price given current market conditions.
Regardless of whether you're looking to cash out or if it's simply time to say goodbye, it's important to understand the process of selling your LLC in order to make sure you check all of the boxes.
How to Transfer LLC Ownership (Partial)
Review LLC documents
Follow Operating Agreement procedures
Notify relevant parties
Update LLC documents
If you have partial ownership of an LLC in addition to stake owned by other members, you may wish to sell only your own portion and bow out. If that's the case, the LLC will continue to run and be operated by the other owners after you leave.
While you may technically be selling your stake in the company to the remaining members or to another party, the requirements differ for a partial sale versus selling the entirety of the LLC. To sell just your portion, there are a few things you'll need to do.
Complete a Review of Your LLC Documents
When you first formed your LLC, you would have drafted an Operating Agreement as well as filed your Articles of Organization. These two documents will need to be reviewed in detail before you can position yourself for a partial sale.
In the case of some companies, details regarding the future sale of the LLC either in full or in part may be listed in the Operating Agreement and can simply be followed. If not, you may wish to consult with an attorney in order to determine the best way to proceed with the sale.
If provisions for selling stake in your LLC weren't defined in your Operating Agreement, it may be necessary to dissolve your LLC instead.
Use Your Operating Agreement as Your Guide
If your LLC's Operating Agreement includes provisions for buying and selling ownership, this is the outline you'll need to follow. Ensure that you have the agreement of all other members and make sure that they sign off on your resolution.
You'll also need to accurately define everything that is being sold along with your share of the business, including any assets or physical components. Be sure that you've put some thought into the timing as well — you should always give advanced notice to the other members to ensure that the transition can be smooth and painless and allow for the LLC to continue to grow after you've left.
Notify All Parties and Update Documents
You'll need to provide notice to either your Secretary of State or business registration agency that you plan to sell your stake, and there are three ways to do this.
Whichever method you choose, the remaining members of the LLC will need to provide their signatures to make it official. Then, the Articles of Organization and the Operating Agreement would require updating to ensure that they contain accurate information about the ownership of the LLC moving forward.
How to Transfer LLC Ownership (Full)
Review LLC documents
Determine sale inclusions
Draft a purchase agreement
Notify your Secretary of State
Determine tax regulations
If you're wondering how to transfer LLC ownership in full, the process is different than when only selling your individual stake in an LLC with multiple members.
In this scenario, the entirety of your LLC will be sold to a buyer who will then assume complete ownership and rights to your business and operate it after you've left.
Complete a Review of Your LLC Documents
Similar to selling your stake in an LLC that will continue to be run by remaining members, selling your LLC in full requires you to consult your Operating Agreement and Articles of Organization.
These documents should include provisions for selling your LLC in its entirety, but if they don't, you may need to hire an attorney to help navigate the process. This step ensures that your business will be sold in a manner that causes the least amount of impact to the business before, during and after the sale takes place.
Establish What Will Be Included in the Sale
As is the case when selling just about anything large in size, it is paramount that you outline exactly what the new owner is purchasing. This should be a full accounting of all property, assets, trademarks, equipment and more.
In some cases, a buyer may only wish to purchase your assets and will otherwise dissolve the LLC when they take it over, so you'll want to understand what the buyer is looking to acquire and document all of it in preparation for the LLC transfer of ownership.
Draft the Purchase Agreement
The next step in terms of how to transfer LLC ownership involves the physical bill of sale or purchase agreement. Once you have accounted for every item to be included in the sale, you'll need to record it all in the agreement and have all existing LLC members sign off on it.
There are several components to build into your purchase agreement, including:
If the LLC will be purchased in its entirety or whether there are specific parts being sold
An itemized list detailing each and every asset that will be included
The timeline of the sale and specific dates that are worthy of mention
Agreement from all existing members who hold an ownership stake
Any and all other details that may pertain to the sale or be of relevance during the LLC transfer of ownership process
Notify Your Secretary of State
To complete an LLC transfer of ownership, you must notify your Secretary of State, or, if the LLC is located in Alaska, Hawaii or Utah, the applicable business registration agency (such as Hawaii's Department of Commerce and Consumer Affairs).
Depending on which state you formed your LLC in, it may not be possible to transfer the ownership from you to your buyer — in such cases, the LLC would need to first be dissolved and all assets sold to the buyer as per the purchase agreement. The buyer would then form a new LLC with those assets.
Determine Your Tax Regulations
When an LLC is sold to a buyer, there are tax responsibilities to keep in mind. Any profit that is gained from the sale of the LLC is considered a capital gain and, therefore, may be subject to capital gains tax.
It's important to note that at the federal level, capital gains are taxed the same way that regular income is taxed at a maximum personal rate of 37 percent; however, the Internal Revenue Service (IRS) can view capital gains in one of two ways:
If the LLC is less than one year old, a short-term tax rate applies. This means that you'll pay personal tax based on your income on any profit from the LLC transfer of ownership.
If the LLC is more than one year old, a long-term tax rate applies. This means that the capital gains tax will apply. According to the IRS, "The tax rate on most net capital gain is no higher than 15 percent for most individuals. Some or all net capital gain may be taxed at 0 percent if your taxable income is less than or equal to $40,400 for single or $80,800 for married filing jointly or qualifying widow(er)."
Additional Tax Considerations When Completing an LLC Transfer of Ownership
There are a few key elements to consider when reviewing the tax implications that will result from selling your LLC. Doing so could help you reduce the amount of taxes you'll have to pay on capital gains once the transaction is complete.
Calculate the Total Value of Your Business Assets
If you've purchased equipment, machinery or other tangible assets for your business, be sure to include costs associated with the installation as well as training employees to use that piece of equipment.
These costs aren't captured otherwise, but doing so can help you lower the amount of capital gains tax that you're required to pay when you sell your LLC. You aren't able to add costs for maintaining equipment, but installation and training are great examples that can certainly help.
Take Advantage of a Potential Tax-Free Opportunity
It may or may not apply in your particular case, but in the event that the buyer of your LLC owns a stake in their own company that appeals to you, you can do a tax-free exchange where you would assume ownership of their stake in return for selling your LLC ownership stake. The IRS does not charge capital gains tax on stock exchanges between owners of respective LLCs.
Keep Local and State Taxes in Mind
Each state has different requirements for paying capital gains tax when you sell a business. While the federal rate is 15 percent, you can expect to pay state and even local taxes during the exit process.
Tips for Notifying Interested Parties
While taxes are a significant consideration when determining how to transfer LLC ownership, there are a few other tasks that should be initiated — specifically, notices given to the IRS, your bank and your Registered Agent.
Notify the Internal Revenue Service (IRS)
When you complete an LLC transfer of ownership, the new owner may be required to register a new Employer Identification Number (EIN). By notifying the IRS of the sale of your LLC, they can determine if this is the case and also update their records to accurately capture the new responsible party. To notify the IRS correctly, you'll need to file Form 8822-B.
Notify Your Bank or Financial Institution
Your bank will also need to know about the change of ownership in order to update their records and for you to close down any associated accounts that you will no longer need. This can be a simple change done either in person or within your digital banking services, depending on how your specific bank operates.
Notify Other States (if applicable)
LLCs must be registered in each state they plan to do business in, which means that if you formed your LLC in one state but then expanded into one or more additional states, you'll need to notify those states of the LLC transfer of ownership by contacting the appropriate business registration area on each state's website.
Notify Your Registered Agent
Your Registered Agent has been designated to receive all formal communications regarding your LLC. If you formed your LLC with Incfile and use our Registered Agent service, let us know the details of your sale and we'll handle the applicable notifications.
Common Questions Regarding LLC Transfer of Ownership
How Do I Change the Percentage of Ownership in an LLC?
If you're planning to sell your LLC or if an existing owner is leaving, you may be wondering how to change an LLC member's percentage share. First, you'll want to consult your Operating Agreement to review any clause regarding ownership percentages.
If you included this when you first formed your LLC, there should be details regarding how your share will be distributed amongst the remaining members after you exit. Or, you may choose to sell your stake the same way you would sell stock to an investor, in which case the percentage may remain the same for the new member.
Can an LLC Have Unequal Ownership?
Yes — if you formed your LLC with other members who each brought differing investment capital into the business, you may have allocated percentage share differently based on these amounts.
For example, if a member was added to the partnership and invested $20,000 at that time, they would have unequal ownership compared to you if you invested $100,000 or if your contributions throughout the duration of the LLC were considerably higher.
File Articles of Amendment for Your LLC with Incfile
Goals and priorities change, and when they do, you might find that it's time to move on to a new adventure. When determining how to transfer LLC ownership to a new buyer or interested party, Incfile is ready to help you through the process with our Article of Amendment service.
If alterations are necessary for your LLC in order to facilitate its sale in its entirety, or if you are looking to exit from an LLC with multiple members, you can utilize this service to notify your Secretary of State or business registration agency and ensure that you've dotted your i's and crossed all of your t's.
Get started today by filling out the form and filing Articles of Amendment with Incfile.
Chad is a freelance writer and former project manager focused on presenting information on SaaS, technology and business formation.