Ownership of a limited liability company can change for a variety of reasons, including the death of a member, sale of the company or addition of a new partner. Whatever the reason for an ownership change, it's important to make the change official in all the organization's certificates, or else the liabilities of the departing member could cause serious problems for the company. The LLC's operating agreement is usually the first place to check for determining how to process the change.
Check the Operating Agreement
The operating agreement established with the registration of the LLC often has language regarding buy-sell provisions, which state scenarios in which ownership could change and what to do about it. Common reasons include the retirement of one or more owners (owners are also called members), the unexpected death of a member, the outright sale of the LLC or bringing in new partners. There could also be divorce settlements, judgments or other legal reasons triggering a buy-sell provision.
Read More: Consequences of Breaking an LLC Operating Agreement
Situations Where No Buyout Agreement Exists
In situations where no buy-sell provision or buyout agreement exists, it is imperative to create one. Failure to do so could result in the undesired dissolution of the LLC. Just because one person wants out doesn't mean the entire LLC member group does. Whether you have an attorney draw up the provision or you complete a template found online, make sure you clearly state the terms of the buyout to prevent future issues.
Also, if done incorrectly, member liability can still exist. For example, a member might no longer help with operations or stop receiving profit sharing. This inactivity doesn't mean the member is automatically removed from ownership. If this member later files bankruptcy and the courts realize the member still has ownership interest, the LLC could wind up paying the personal debts of the inactive member.
Completing the Buyout Agreement
While there are many templates available online, the buyout agreement has several common components. The parties involved should be clearly named with contact information, membership unit ownership and the value of that ownership. Clearly state if the member is relinquishing herself or being bought out.
For example, in a divorce scenario, a husband might relinquish himself for no monetary consideration as part of the divorce decree. In other situations, the member's share value might be purchased by another party or by the LLC itself. This is common with "key man" insurance policies that pay the LLC to buy out a key person's interest so the business can continue to move forward without encumbrance after the death of an owner.
Make It Official: Update Certificates
Once you've completed the buyout agreement, update the certificate of organization to reflect the new ownership changes. Have the member who is releasing ownership turn in any member certificates. Issue a new member certificate with the valuation of interest to the new owner if applicable. If there is no new owner, and the LLC holds the remaining interest, then either split the interest among the remaining members or have the LLC retain the units that can later be issued.
Kimberlee Leonard had a successful career in financial services, insurance and tax preparation before becoming a full-time writer. She has worked with major institutions such as Wells Fargo, First Hawaiian Bank and State Farm.