Ownership of an LLC is a bit more complicated than ownership of a corporation. Often, owners do not have “shares” and so their ownership is only catalogued in the Operating Agreement of the LLC. This makes selling and buying of LLC ownership complicated for most people to manage without an Attorney, such as our friends at Mughal Law Firm, PLLC, to review different business structures and ownership options.
How to set up ownership of an LLC?
Setting up ownership of an LLC can be done in many ways. Within the operating agreement, an LLC can specify a certain percentage ownership to the various owners. This is the most common practice but not always the best option. For example, an Operating agreement could say something like “Bob owns 49% of the LLC and Sarah owns 51%”. In this scenario, in order for Sarah to become 100% owner, she would have to purchase Bob’s 49%. Another way to set up an LLC is to refer to ownership as a collection of shares. In this scenario we would say something like “LLC shall have 2000 shares” and “Bob is issued 900 shares and Sarah is issued 1100 shares.” This method is more preferable simply because it makes the division of ownership simpler. Instead of having multiple owners having decimal percentages, all owners will have a whole number of shares which then can be valued individually and transferred as needed.
How to buy and sell ownership of an LLC?
Each LLC may be different and require a careful examination of the Operating Agreement to determine how ownership can be bought and sold. For instance, you may have restrictions in your ownership agreement preventing you from simply selling your ownership to someone on the street. However, if the restrictions allow it, oftentimes all that is needed is a purchase agreement, some sort of valuation of the ownership, and an amendment to the Operating Agreement, reflecting the new ownership.
Should I consult a Lawyer before buying or selling Ownership of an LLC?
The short answer is yes. If there are mistakes in the process of transferring the ownership of an LLC, it may result in the transfer being voidable by a Court of law or ignored by the LLC itself. For example, if you fail to follow the proper restrictions of transfer, an LLC can legally ignore your purchase of ownership and refuse to update their Operating Agreement to reflect your ownership. Alternatively, if your transaction does not have the proper consideration, it can be attacked in court for the transfer to be voided. In this scenario, if you buy 50 shares of an LLC for $1 when in actuality those shares are valued at $1000.00 each, the previous owner could attack the transfer and try to get it struck down as a void transaction due to the failure of consideration.