How To Sell an LLC: Tips and Best Practices
As the saying goes, the best-laid plans can go astray. If the conditions under which you formed your limited liability company (LLC) change and you want to sell all or part of the business, you must follow certain rules and procedures.
LLCs usually detail those rules and procedures in their business’s operating agreement. But if your company has no provisions for unexpected events, state laws will apply, and you might find that the future of your business is out of your hands.
How the Operating Agreement Impacts the Sale of the LLC
When you formed your LLC, you likely drew up an operating agreement. Unlike the articles of organization that you filed with the state, which can be as simple as a statement of the business name, location, and the names of the owners, an operating agreement defines how the business will run.
Only five states—California, Delaware, Maine, Missouri, and New York—require LLCs to have an operating agreement. But, having one can be important when some or all of the LLC owners (called members in an LLC business structure) want to transfer ownership of the business.
An operating agreement typically covers:
- Percentage ownership of each of the members
- Distribution of profits
- Tax structure of the LLC
- Management structure
The operating agreement might also include a method for determining the company’s value.
If the members of the LLC were diligent about creating an exit plan, they probably included a buy-sell provision in the operating agreement or set up a separate buy-sell agreement that includes a more detailed process for selling a membership interest in the LLC or the entire business.
What Is a Buy-Sell Agreement?
A buy-sell agreement sets up the conditions, restrictions, and procedures for transferring interest in an LLC.
Buy-sell agreements typically define how to sell an LLC, including:
- Events that can trigger a sale, such as the death, disability, divorce, bankruptcy, or retirement of a member; voluntary exits; or adding a new member
- Restrictions on who can become a member, including a requirement that existing members must approve the addition of or sale to a new member
- Right of first refusal provision that gives remaining members the option of buying a departing member’s interest in the company before it is offered to outsiders
- Method for valuing the business
- Procedure for redistributing existing shares when a member departs
- Process for funding the transfer of a member’s shares to remaining members
Small businesses also commonly require the members of the LLC to purchase life insurance as a way to fund the purchase of an interest from a member who dies. They might also set aside a percentage of profits to fund the buyout of an owner’s interest if a triggering event occurs.
What if There Is No Buy-Sell Agreement?
A buy-sell agreement can be a separate document or a provision included in the operating agreement. But if the LLC members haven’t formally provided for the sale or transfer of an ownership interest, state laws govern how to sell an LLC.
Some state laws require the LLC to be dissolved if a member departs a company that doesn’t have any buy-sell provisions.
Transferring Partial or Full Interest in an LLC
Transferring partial or full interest in an LLC is similar to any other business sale. Business owners must plan an exit strategy, set an asking price, attract buyers, negotiate strategies, and finalize the deal. However, the unique nature of the LLC business structure requires all members to agree on and approve the sale and selection of a new owner.
Likewise, valuing the business and each member’s interest can be complex, and the LLC sale’s legal and tax implications require specialized expertise.
The following steps will walk you through how to sell an LLC business.
Get Professional Advice
It’s a good idea to consult a business attorney and a tax advisor or CPA at the start of the process. Besides offering legal advice on how to sell an LLC, an attorney can facilitate the sale by negotiating disputes that might arise between members.
The tax treatment on the sale of an LLC or an ownership percentage can vary depending on the length of time the selling members held their interest, the structure of the sale, and what is being sold. A tax advisor or CPA can reduce tax liabilities resulting from the sale.
Get a Business Valuation
A single-member LLC can sell the business for any amount to anyone (provided there’s a market for it). But even if only one member of a multi-member LLC wants to divest, you’ll need a business valuation to determine the value of each member’s interest.
Valuing a member’s interest in the LLC isn’t as simple as establishing the amount each owner invested in the business. Each member’s contribution to the company’s growth and its current value can differ.
While a business broker can help establish a realistic valuation for the company based on the business’s assets, income, future income potential, and comparable sales of similar businesses, an attorney can help the members negotiate the many variables involved in establishing an asking price for a member’s share.
Find a Buyer
Because of the challenges involved in valuing an ownership interest and the need for unanimous consent on the asking price, LLC operating agreements often require departing members to sell their shares back to the other members of the LLC.
Finding a buyer for a membership interest can be even more challenging when the remaining members must agree on the selection. When the decision is made to seek an outside buyer, a business broker can market the business and identify the largest pool of potential buyers.
Create a Sales Agreement
Once a buyer is identified and the sale price is agreed upon, buyer and seller must create a sales agreement outlining the sale price and terms. When the entire LLC is being sold, the sales agreement must also define what is being sold (assets or the business). All LLC members must approve the agreement, whether a partial sale or full sale.
File Articles of Amendment and Update the Operating Agreement
When the bill of sale is properly executed, the LLC must notify the state of the changes in ownership by filing articles of amendment with the Secretary of State or other business registration agency. Articles of amendment revise the articles of organization filed when the business was formed to reflect the new ownership structure.
The operating agreement should also be updated to remove members who have sold and to document the new members’ rights, responsibilities, and ownership interests.
Issue LLC Membership Certificates
Similar to stock certificates, LLC membership certificates document the number of shares a member owns. These certificates also typically include the member’s investment and their rights and obligations. You can find templates for LLC membership certificates online.
Notify the IRS
The Internal Revenue Service requires written notification of changes in LLC ownership and the responsible party for IRS-related matters within 60 days on IRS form 8822-B.
You might also need to cancel your existing Employer Identification Number (EIN) and apply for a new one.
Notify the Registered Agent
An LLC’s registered agent might have a single point of contact for the business, several contacts, or be instructed to notify all LLC members when official documents are received or transmitted. Notify the registered agent of the change of ownership to ensure that documents are transmitted to all who need them.
Notify Banks, Lenders, and Other Financial Institutions
You’ll have to notify the financial institutions that the LLC conducts business with changes to the individuals authorized to access accounts and conduct transactions.
Closing the Gaps
Even the sale of a single member’s interest in a multi-member LLC changes the nature of the business. LLC owners should follow any rules that apply and make all the necessary notifications. Foreign LLCs that do business in multiple states must notify the appropriate agencies in each state. Vendors and customers might have to be notified, and ownership changes should also be recorded in the LLC’s annual report.
There are a variety of considerations when it comes to how to sell an LLC that business owners must consider. In addition to having an operating agreement in place, preparing an exit strategy three years prior to transferring or selling a single member LLC, or a share in a multi-member LLC, is crucial. Having a team of experts to guide you through this process is invaluable. Visit the BizBuySell Broker Directory to find a broker to assist you with selling your LLC.