Sale of LLC Member Interests

What if I decide later to sell 50% of my SMLLC. Would it be sold as a member interest? If not, what would I be selling exactly? Or, can I even bring in a “partner” in this structure since the name itself indicates a single member?

Answer

An LLC with one member is a “single member LLC”. By selling half your member interest to another person, the LLC is now a multi-member LLC. A membership interest in an LLC is an asset which can be sold just like stock in a c-corporation.

Check with your accountant to determine the tax implications of selling an LLC membership interest–you might show either a gain or loss on the sale of that interest (just like you would selling stock in a corporation). Depending on how long you held that interest before selling it, the sale could be classified as either a long term or short term capital gain.

After the sale, while the LLC would no longer technically be a single-member LLC, you would not have to refile your Articles of Organization or anything like that.  Most states do require annual reports from all LLCs, and some of those reports include listing all members of the LLC.

The only change you might have to make is if the LLC was previously filing its taxes as a disregarded entity, the LLC would now have to file a an annual partnership tax return (Form 1065) and issue K-1s to each member. The pass-through taxation would remain the same (unless you specifically elect otherwise and file the appropriate tax forms).

Finally, when your company takes on a new member for the first time, you should review the LLC’s operating agreement carefully. Oftentimes, an LLC that starts out as a single member will have a simplified operating agreement.

Once additional members are present, your operating agreement should reflect the issues that having additional members causes.

For example, if a member wants to sell their interest, do the other members get right of first refusal to purchase the shares before an outsider does?

How are profits divided? Do you take into account the fact that the founding member invested money in the LLC before the new member joined?

Just a few things to think over in putting together your deal.

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