Key Takeaways:

  • Selling shares of an LLC differs from selling corporate stock; LLCs are owned by members with ownership interests, not shares.
  • An operating agreement is critical in determining the process of transferring ownership interests.
  • Valuation methods such as market comparisons, asset-based approaches, and income-based approaches help determine the LLC’s worth.
  • State laws may impact how ownership interests can be sold or transferred.
  • Tax implications must be considered when selling LLC ownership, including capital gains and pass-through taxation.

Selling Shares in an LLC

Selling shares in an LLC can seem like a rather daunting task, full of questions. Perhaps a friend is a partner in an LLC that is doing well and you’re curious as to whether or not you can get in on the action by buying some shares. Maybe you have been a partner in an LLC and you want to have a decreased investment in the company.

What Is an LLC?

An LLC, or Limited Liability Corporation, is privately held, not publically held. As such, they do not trade shares (also known as stocks) on the Stock Exchange.

There is an exception to this, and that is an LLC that is structured as a Publically Traded Partnership or PTP. Due to the restrictions that the Internal Revenue Service places on PTPs regarding qualifying income, many PTPs are found largely in the energy and natural resource industries. Once a company, even an LLC, begins trading on a stock exchange, they are held to the same standards of public reporting as a publically held corporation, whereas an LLC that is not a PTP has no public reporting obligation. Additionally, a PTP can only trade up to two percent of its partnership each year.

How Does an LLC Differ From a Corporation?

Here are some of the key differences between an LLC and a corporation:

  • A corporation maintains a board of directors, which serves as the governing body to whom the C-Level staff (Chief Executive Officer, Chief Operating Officer, et al) report.
  • The people who “own” a corporation are often called shareholders, whereas with an LLC, they are partners or members. The members of an LLC are the decision-makers; the decision-making of a corporation, (also known as a C Corporation) is handled by those who own majority shares. This is typically limited to the Board of Directors and the executive staff.
  • Corporations are required to conduct regular meetings of the Board of Directors and keep minutes of such meetings; an LLC has no such requirement (remember: an LLC is not required to even maintain a Board of Directors).
  • Shareholders of a corporation are not held liable for fiscal responsibilities, however, the members of an LLC can be held liable.
  • In an LLC, the members pay taxes on the profits, whereas with a corporation, the company itself pays the taxes, not the shareholders.

Understanding LLC Ownership Interests

Unlike corporations that issue shares, LLCs distribute ownership through membership interests. Each member owns a percentage of the business, which reflects their contribution and rights. Ownership percentages dictate profit distribution, voting power, and financial liability.

Ownership can be structured in various ways, such as:

  • Equal ownership: Each member has the same percentage.
  • Capital-based ownership: Shares are based on initial contributions.
  • Performance-based ownership: Shares shift over time based on member contributions.

Before selling a portion of an LLC, it’s essential to review the operating agreement to understand transfer restrictions and profit-sharing rules.

How Does an LLC That is Not a PTP Sell Shares?

Essentially, an LLC operates much like that of a partnership. This means that the members of the LLC decide among themselves how they go about buying or selling percentages of business.

If you are a member of an LLC, hopefully the company had the foresight to establish upfront the parameters of doing this, or an operating agreement. Without an operating agreement, the withdrawal of a member can create a lot more than simply hurt feelings; it can create a heap of legal and financial problems as all parties attempt to determine how to best liquidate the exiting member’s percentage in the company without perhaps bankrupting the LLC.

If the company does not have the liquid assets to simply cut a check to the selling member (depending upon the construct of the operating agreement), the remaining members may be required to contribute capital to the company. The easiest way, as an existing member of an LLC, to sell your shares is to simply sell them to a new member who is willing to buy your shares, as 100 percent of the shares of an LLC are required to be split among all of the members.

Steps to Selling LLC Ownership Interests

To sell a percentage of an LLC, follow these steps:

  1. Review the Operating Agreement
    • The agreement often includes buy-sell provisions, outlining restrictions on transferring ownership.
    • Some agreements require unanimous member consent before an ownership sale.
  2. Determine the Value of Your Ownership Interest
    • LLC interests are valued using:
      • Market-based valuation (comparison to similar businesses)
      • Asset-based valuation (calculating net assets)
      • Income-based valuation (projecting future earnings)
  3. Notify Other Members
    • Many LLCs require existing members to have the first right of refusal before selling to an external party.
  4. Draft a Buy-Sell Agreement
    • This document outlines:
      • Buyer details
      • Percentage of interest sold
      • Sale price and payment terms
      • Liabilities transferred
  5. Obtain Necessary Approvals & Update Legal Documents
    • File an amendment with the state to reflect ownership changes.
    • Update tax documents with the IRS if ownership structure changes.

The Only Certainties in Life Are Death and Taxes

Unless you happen to be a tax attorney with a membership in an LLC, you will want to be sure you consult professionals if you are selling your shares to ensure that you are paying the appropriate amount of taxes on the money you receive versus your original investment. This is particularly important when considering you were already paying taxes on the income being generated by the LLC. Hopefully, the LLC from which you are looking to exit does not possess any outstanding debt; otherwise, you will be on the hook for contributing some of your profits from the sale to paying down that debt.

Tax Implications of Selling LLC Shares

When selling ownership in an LLC, taxation depends on its classification:

  • Single-Member LLCs (Treated as Sole Proprietorships)
    • The sale is reported as capital gains on the member’s tax return.
  • Multi-Member LLCs (Treated as Partnerships)
    • The buyer assumes a proportionate share of liabilities.
    • A Form 1065 Schedule K-1 must be updated to reflect the ownership transfer.
  • LLCs Taxed as Corporations
    • The sale may trigger corporate tax obligations if the LLC elects C-Corp or S-Corp tax treatment.

To minimize tax liability, consult a tax professional before finalizing the transaction.

Frequently Asked Questions

  1. Can you sell shares of an LLC like corporate stock?
    No, LLCs do not issue shares like corporations. Instead, they distribute membership interests, which can be sold under the terms of the operating agreement.
  2. Do I need approval from other members to sell my LLC ownership?
    Yes, most LLCs require existing members to approve new ownership or have the first right of refusal to buy the interest.
  3. How do I determine the value of my LLC ownership?
    Use business valuation methods such as asset valuation, income approach, or market comparison to determine the fair market price.
  4. What are the tax consequences of selling my LLC interest?
    Taxes depend on whether the LLC is treated as a sole proprietorship, partnership, or corporation. Gains may be subject to capital gains tax or pass-through taxation.
  5. How do I legally transfer my ownership in an LLC?
    Draft a buy-sell agreement, obtain member approvals, and file legal amendments with the state to update ownership records.

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