Selling your LLC might sound like an easy process, but there could be some severe consequences if you are not careful. This guide covers the complete process of selling your LLC and lists the steps you need to follow in order to successfully sell your LLC.
Upon the inception of an LLC, members of an LLC usually create a binding contract known as an operating agreement. The operating agreement decides the operations of an LLC and its eventual buy-sell contracts and other provisions related to them.
If your LLC has such an operating agreement that defines the process of selling your LLC, selling your LLC will become a lot easier, as all you would have to follow is the steps listed in your operating agreement. However, it is different if you don’t have an operating agreement that defines the process of selling your LLC, and that is where you need to be extra-cautious.
TYPES OF TRANSFERRING THE OWNERSHIP OF AN LLC
It is where it all begins – you have to identify the kind of transfer you want to make. In this context, you have two options; changing the membership of your LLC and selling the LLC itself.
- Changing the LLC membership
It is one way of granting the ownership of your LLC to another person or entity. Whether an existing member is leaving the LLC or adding a new member to your LLC, you would have to follow the buy-sell agreement of your LLC and provisions in it.
A buy-sell agreement refers to guidelines that were set during the formation of your LLC. These guidelines define the process of how to change the LLC membership. It usually explains that the existing members of the LLC will vote on the change of membership, and the final decision would be on the majority vote. However, if the buy-sell agreement of your LLC has different provisions than voting, you would have to follow them.
- Selling the LLC itself.
It is a slightly tricky process as compared to changing the LLC membership. In this process, you sell the entire LLC, its stocks, assets, liabilities, and everything related to your LLC in any way. You will have to give up on the membership of your LLC, along with other members, if the LLC is multi-membered.
Upon the inception of LLCs, most LLC owners draft the initial sale agreement in a memorandum of understanding followed when selling your LLC. However, even after you have the sale agreement on your term sheet, you still need to follow up with a formal contract of sale. Since this process is complicated and requires an advanced understanding of legalese, it is always recommended to consult a legal expert when you are selling your LLC as a whole.
LEGAL REQUIREMENTS THAT REQUIRE CONSIDERATION
After you have decided on the type of transfer of ownership you want, it is critical to follow the legal requirements to execute the final steps of transfer of ownership of an LLC.
These legal requirements could be both internal and external. In internal legal considerations, the operating agreement of the LLC is of most importance. At the same time, externally, specific laws are related to both the state and the federal laws that you have to follow religiously.
- Operating agreement
When an LLC is formed, its members usually sign a binding agreement that defines how the LLC will operate and how it will be sold. If your LLC has an operating agreement that defines the buy-sell provisions, you need to follow it to sell your LLC or add a new member.
- Laws of home state
Along with following the operating agreement of the LLC, you have to follow the laws of the home state of your LLC. Every state has its business laws that could vary slightly from some states while drastically from others. It is why you need to have a good knowledge of the laws of your form when you are making an ownership transfer of your LLC.
As an entrepreneur, it is imperative that you understand the fact that a good businessman doesn’t always mean a good lawyer, and it is where expert assistance is required. If you are confused about selling your LLC, don’t hesitate to get help from attorneys and other law experts.
Events that are covered under a buyout agreement
Usually, some highlighted events trigger the buyout of an LLC member’s interest under a buyout agreement, and they are:
- The death, disability, or incapacity of a member.
- The foreclosure of a debt secured by a membership interest.
- Member’s resignation or retirement.
- The bankruptcy of the member.
- Better offer from an outsider to purchase the member’s interest in the company.
As a savvy entrepreneur, you must think and plan the future, keeping in mind that your circumstances can change at any time. It is why it is always an excellent approach to have a buyout agreement for any future operations related to the sale of your LLC.
Selling the equity in your LLC.
Now that we have discussed selling an LLC, we will look into how we can sell equity in an LLC. Since an equity position in an LLC is an ownership position, selling the equity position in your LLC is about creating a new membership interest in your LLC.
The person who will buy the equity in your LLC will become the owner or member of your LLC. There is no difficulty in selling the equity in your LLC as long as the operating agreement of your LLC allows you to do so.
What are the tax implications of selling an LLC?
For IRS, LLC is not a separate legal entity when it comes to taxation. Internal revenue service recognizes a single-member LLC as a sole proprietorship, while multi-membered LLC is recognized as a partnership.
Either you have a single-member LLC or a multi-membered LLC, both will offer you pass-through taxation. However, knowing how your LLC is being taxed is one of many factors that will decide the eventual tax liability on the sale of your LLC.
When an LLC is sold, its assets and liabilities are also transferred to the new owner of the LLC. So, when a single-member LLC is sold, it would be legally treated as an asset sale since there is no shared interest in equity or any other thing involving the LLC. However, for multi-membered LLC, the deal and the eventual taxation implications are different.
For a multi-membered LLC, tax implications are different and could be complicated at times. For example, multi-membered LLCs’ owners could be subject to capital gains taxes, etc. It is why you should always seek professionals’ help regarding tax implications when you are selling your LLC.
Frequently Asked Questions
This section discusses some of the frequently asked questions related to the sale of an LLC and the implications of sale:
- How is the sale of a single-member LLC taxed?
As discussed in the article, the sale of a single-member LLC is legally treated as an asset sale. The proceeds are passed through to the owner to be taxed on the owner’s income tax return. In multi-member LLCs, however, some members might be subject to capital gains taxes, but it will depend on how long they have held an interest in the LLC.
- How do I avoid paying taxes when I sell my LLC?
The standard way that LLC owners use to reduce the tax liability of their LLC sale is to receive payment over time. By deferring the receipt of proceeds over multiple months and years, they can control their tax rate by managing the sale price ratio that falls into higher tax brackets as designed by the IRS.
- How do I avoid capital gains tax when selling property under an LLC?
The one-word answer to this question would be 1031 exchange. On selling your land under an LLC, you can avoid depreciation, recapture taxes and capital gains by rolling the proceeds of your sale into a similar type of investment within the next six months. 1031 is the relevant section in the tax code that defines this exchange.