How to Change LLC Ownership Percentages

Altering the ownership structure of a Limited Liability Company (LLC) is a formal procedure that must be executed correctly to be legally recognized. The process demands careful attention to the company’s foundational rules and the creation of precise legal documents. Successfully navigating this change preserves the business structure and clarifies the rights and responsibilities of all members.

Initial Steps and Review of the Operating Agreement

The impetus for changing ownership percentages can arise from admitting a new member, the departure of an existing member, or a strategic recapitalization. Regardless of the reason, the first step is a thorough review of the LLC’s Operating Agreement. This internal document is the primary source of governance for the company and dictates the procedures for modifying its structure.

Within the Operating Agreement, members must locate the specific provisions that govern the transfer of ownership. These clauses detail the protocol, including transfer restrictions or a “right of first refusal.” The agreement also specifies the voting requirements needed to approve a change, such as a simple majority or supermajority. If an Operating Agreement does not exist or fails to address ownership changes, members must defer to the default rules established by state law.

Determining LLC and Membership Interest Valuation

A formal valuation is a component of any ownership change, providing a defensible basis for the transaction and ensuring fairness among all members. The valuation establishes the price of the membership units being transferred and is a figure for legal and tax documentation. For tax purposes, an accurate valuation is necessary to determine potential capital gains for the seller or to substantiate the value of a gifted interest.

The method for determining the LLC’s value may be prescribed within the Operating Agreement. If the agreement is silent on this matter, members choose from several standard business appraisal methodologies. An asset-based valuation calculates the company’s net worth by subtracting total liabilities from the total value of its assets.

A more common approach is an income-based method, such as discounted cash flow (DCF) analysis, which projects future earnings and discounts them to a present-day value. Another option is a market-based approach, which compares the LLC to similar businesses that have recently been sold. Given the financial and tax implications, engaging a professional business appraiser is often a prudent step to ensure the valuation is accurate.

Required Documentation for an Ownership Change

Finalizing an ownership change requires specific legal documents that formally record the transaction. The central document is an Amendment to the Operating Agreement, which legally alters the company’s governing document to reflect the new ownership structure. To draft it, you will need the legal names of all members, their original and newly established percentages, the effective date, and any new capital contributions.

Alongside the amendment, a formal transfer document is necessary, such as an Assignment of Membership Interest or a Bill of Sale. This document acts as the official record of the transfer from one party to another. It must identify the seller and buyer, the specific percentage of membership interest being transferred, and the purchase price or other consideration.

The LLC must also update its internal records to reflect the new ownership arrangement. This involves updating the company’s membership ledger, which is the official internal list of all members and their respective ownership stakes. Following the change, new membership certificates should be issued to all members as physical proof of their new ownership percentage.

Executing the Transfer and Notifying Agencies

With all documentation drafted, the final step is the formal execution of the transfer. All members, as required by the Operating Agreement, must sign the Amendment to the Operating Agreement and any accompanying transfer documents. This act legally binds the parties to the new ownership structure. Once signed, these documents become part of the LLC’s official records and should be stored securely.

After internal finalization, the LLC must determine if external notifications are required. Some states mandate that an LLC file an amendment to its Articles of Organization if the change involves adding or removing members. This filing updates the public record with the state’s business filing agency, typically for a nominal fee.

Notification to the Internal Revenue Service (IRS) is necessary if the change results in a shift in the LLC’s tax classification. For example, if a single-member LLC adds a new owner, it becomes a multi-member LLC and requires a new Employer Identification Number (EIN). A change in ownership percentage among existing members of a multi-member LLC does not require IRS notification.

If the responsible party for the LLC changes, Form 8822-B must be filed with the IRS within 60 days. Additionally, LLCs must report ownership changes to the Financial Crimes Enforcement Network (FinCEN). Under the Corporate Transparency Act, an updated report must be filed with FinCEN within 30 days of a change in the company’s beneficial ownership.