When it comes to transferring partial LLC ownership, the process is usually set out in the operating agreement. An operating agreement defines the framework of your LLC on paper. It lists the name and purpose of the company, its tax status, the owners – called members of an LLC – and their percentage of ownership, the management structure of the company, its operating procedures and the agreement buy-sell.
The latter — the buy-sell agreement — is a key part of the process.
Most LLC operating agreements include a buy-sell agreement and other terms relating to the transferability of LLC member interests. A buy-sell agreement is a contract between the owners of the LLC that sets out the terms of the sale of shares of the LLC. Specifically, it outlines what events can trigger a sale, who can buy membership interests, a method for determining the value of those interests sold, and how to finance the sale. So. When you want to transfer ownership of the LLC, before you even spend a minute negotiating, the purchase-sale agreement is the first place you should look.
Typically, the buy-sell agreement will define what to do if an LLC member dies, divorces, goes bankrupt, becomes disabled, or wants to retire. But every business is unique, so you may need additional provisions to suit your needs.
In a small business, it is common for buy-sell agreements to require members to purchase life insurance policies against all other members, so they can use the insurance payment to fund the purchase of interests from the deceased partner’s estate. It is also common to set aside a percentage of profits each year to fund the purchase of another owner’s stock in the event of a triggering event.
The buy-sell agreement may also dictate who can buy an equity stake in the business and whether the purchase must be approved by members of the LLC. It can allow or prevent strangers or at least give priority to existing members before taking offers from strangers.
Transfer of partial ownership of LLC without operating agreement
A buy-sell agreement is usually included in the operating agreement, although it can exist independently. Similar to an operating agreement, there is no need to create a buy/sell agreement when setting up the business.
If there is no buy-sell agreement, you can add one to your operating agreement by drafting and voting on the addendum. You may also follow any transfer provisions contained in your state’s LLC laws. A final option is to dissolve the LLC and reform it.