A limited liability company (LLC) is owned by members. The structure of an LLC is framed by state statutes, but is largely determined by the governing documents of the individual entity. Generally, LLCs combine some aspects of partnerships (flow-through taxation) with those of corporations (limited liability). Because few LLCs are publicly traded, transfer of ownership can represent some challenges, most of which are best dealt with by good initial planning.
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Sell to other members. The most common way to change ownership of an LLC, if it is owned by more than one member, is to sell the individual ownership interest to other existing members. The major obstacle, however, can be pricing the partial ownership. If it is a minority stake held by a nonmanaging member, the majority/managing members can have significant negotiating advantages.
Contract to sell to other members. The members of an LLC can essentially organise their business however they choose under agreements analogous to contracts. Buy-sell agreements or clauses can stipulate from the very initiation of the LLC how ownership in the limited liability company can be priced and transferred. The details of such agreements include how to calculate the price of an ownership interest and where the funds for the sale should come from.
Sell to third parties. An option for changing the ownership of an LLC is to sell to an outside party. If the owner is an individual, this is a likely event. The owner can simply accept cash or other consideration and amend the operating documents of the LLC to reflect the change in ownership. A minority owner in an LLC, however, will likely have a hard time finding a third party willing to purchase her share of the company and does not have recourse to public stock markets.
Sell assets. Another way to change ownership of a limited liability company, in effect, is to sell its assets. Excepting intervention by a court stipulating otherwise, sale of assets prevents the liabilities of the LLC from becoming liabilities of the new owner. The original LLC will continue to exist, but without assets, is unlikely to operate and will likely become dormant. Meanwhile, the purchaser takes possession of the company's assets and can now operate in its stead.
Go to court. In situations where two equal factions of owners are at an impasse, or a minority owner is unfairly dominated by a majority interest, courts can intervene and mandate remedies. A court can award damages, force the sale of an ownership interest, set the price of such a sale or force the company into dissolution to satisfy the interest of fairness.
Tips and warnings
- Ownership interests in an LLC are generally determined relative to the initial capital investment of the members and can be modified almost without limit by the members. The accumulation of sweat equity, for example, often gives managing members an increased ownership interest over time either by default or through direct compensation of the other members.
- The principles and practices regarding LLC ownership generally follow those of closely held corporations.
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