People may be curious about how to begin or start a limited liability company from the ground up. A business investor, however, may discover an existing LLC that owns assets that he wishes to acquire. As an alternative to purchasing the assets, you, along with a few business partners, may decide to make an offer to acquire the membership interests in the LLC itself.
Negotiate with the members of the LLC. These negotiations may cover such topics as price to buy out the membership interests, costs involved in a due diligence search, value to be placed on the goodwill or good name of the business, and whether or not the buyer assumes the existing liabilities of the LLC. By purchasing the membership interests in the LLC, you may be avoiding the cost of transferring assets, which may include document preparation, licensing, permits, any other legal documents.
Perform a due diligence search prior to the purchase. A due diligence search may involve credit checks in the name of the LLC as well as environmental studies and title searches on real estate owned.
File articles of amendment with the secretary of state's office in the state where the LLC is organized once the acquisition has taken place. The articles should state the name and address of the new registered agent for the LLC, as well as the names and contact information for the new managing members. If the LLC is registered as a foreign LLC in other states, you will also need to file appropriate documentation with those states reflecting the change in ownership.
Review the existing operating agreement, and upon acquisition of the membership interests, amend any terms to comply with the desires of the new members. An operating agreement contains the rules and regulations that govern the operations of the LLC. Operating agreements are not required in all states; however, most LLCs that are organized by unrelated members or that have substantial business interests will have one. Contact an attorney familiar with business transactions to assist in amending the operating agreement, as it can be a lengthy document dealing with complex business issues.
One advantage to purchasing the membership interests in the LLC as opposed to the assets owned may be in the cost of title insurance protection. The LLC should already have an owner’s title policy in place in its name covering the real estate owned. If the real estate consists of a very valuable commercial parcel, the cost of endorsing an existing owner’s title policy to give protection through the date of the purchase of the membership interest may be far less than the premium for a new multimillion dollar policy. Exercise caution, however, by making sure the existing policy covering the LLC has appropriate endorsements, such as a fairway endorsement, which gives the LLC coverage and protection after the change in member ownership.
Before acquiring the interests of an LLC, you should consult an attorney and an accountant who are competent in business structure and tax law.
State law regarding membership changes for LLCs may vary. Discuss the ramifications of acquiring LLC membership interests with an attorney in your state.
- Mikkelborg, Broz, Wells, Fryer: LLC Business Purchase: Assets or Membership Interests?
- First American Title: Title-Insurance Endorsements for Limited Liability Company Transactions
- KeytLaw: When an Arizona LLC Must Amend it Articles of Organization
- Law Office of Melissa C. Marsh: Why A Well Written Attorney Prepared California LLC Operating Agreement is Essential
- Jupiterimages/Photos.com/Getty Images