Business Startup

Important Considerations When Transferring LLC Ownership Interests

When buying or selling an ownership interest in an LLC, it’s important to consider several key issues that may affect the transaction. Today’s post highlights some of these important considerations when transferring LLC ownership interests.

Are there any restrictions on your ability to transfer the interest?

transferring llc ownership interestsMost operating agreements will provide provisions that discuss the process for transferring a member’s interest. Many operating agreements require the member to provide notice of the transfer and often include a right of first refusal, which right allows the company to match the terms of a sale of a member’s interest (more on this topic below). And some operating agreements do not allow for a member to transfer his or her interest without unanimous member consent.

If the LLC does not have an operating agreement, then the transfer would be subject to the rules described in RCW 25.15. Washington’s statutes require unanimous member consent in order to admit a transferee (the individual or entity purchasing an existing member’s interest) as a member of the LLC, and members do not have any default right to withdraw from an LLC prior to its dissolution.

Is there a right of first refusal attached to your ownership interest?

If present in the company’s operating agreement (or some other agreement between the member and the company like a buy/sell agreement), a right of first refusal gives the company the right to match the terms of any sale of a member’s ownership interest. Typically, the member is required to provide notice to the company of his or her intent to sell the interest, along with details about the terms that a potential third party buyer has agreed to in order to purchase the interest. The company will then have a specific period of time to match the terms or allow the sale to occur. A right of first refusal is primarily used to “police” transactions that would lead to an unfamiliar or hostile partner joining the company, while still allowing for transfers as a matter of right.

Taxes, taxes, taxes

It is important to understand the tax consequences of the transfer of LLC ownership interests. There can be complicated tax and bookkeeping issues to deal with when member interests are sold and new partners are joining the company. For example, determining a member’s tax basis in his or her membership interest can be complicated, and sorting out how to classify the gain on the sale of a member’s interest will depend on several factors. We always recommend discussing the transaction with your tax advisor to make sure you’re fully aware of the tax consequences of the transfer.

Depending on the LLC’s activities and the details surrounding the transfer, there will likely be several other important factors for you to consider when you’re transferring LLC ownership interests, such as non-compete and non-solicit agreements, and securities laws.

If you’d like to learn more about transferring LLC ownership interests, or you’d like to discuss the details of your transfer, please contact us today.

PhotoBjörn Láczay | Flickr

 

        


Gavin Johnson

Gavin enjoys craft beer and is learning the art of brewing.


146 N Canal Street, Suite 350   |   team@invigorlaw.com