Selling an LLC is more involved than selling an asset like a car, or even a house in most cases. You have legal documents to review, tax consequences to weigh, and, depending on how your business is structured, other members whose approval you may need.
Don’t be overly intimidated by the multiple aspects of selling an LLC business, though. The process is well-established, and is entirely manageable with preparation and guidance. Here’s an overview of the decisions, steps and considerations involved.
Can you sell an LLC?
Yes, an LLC absolutely can be sold. The process involved is dictated by the limited liability company (LLC) structure, which is different from a corporate (C-Corp) structure.
Ownership of an LLC is divided up into membership interests, and the business is sold by transferring those membership interests. This is true whether you’re a solo-member LLC or have many members. You sell by transferring your membership interest.
Ownership of a corporation is divided up into shares of stock. Even private corporations have stock shares that aren’t publicly available. Selling a corporation is done by selling shares of stock.
The difference between membership interest and stock is more than semantic. These are fundamentally different types of ownership, and are transferred according to different rules.
The process of transferring membership interest in your LLC is determined by your LLC’s operating agreement, the state where the business is formed, and whether it’s a full or partial sale, yes, you can sell part of an LLC.
Note: LLCs can select S-Corp status for tax purposes, but doing so also impacts the selling process. S-Corp tax status invokes many IRS rules similar to those governing C-Corps and B-Corps. If your LLC uses the S-Corp option when filing taxes, seek guidance from a qualified tax professional who’s familiar with these more complex regulations.
Membership interest sale vs. asset sale
The most important structural decision in an LLC sale is whether it will be a membership interest sale or an asset sale. These two approaches lead to very different outcomes for both the seller and the buyer.
Membership Interest Sale
In a membership interests sale, the buyer purchases the seller’s actual ownership stake in the LLC itself. The company continues to exist exactly as it did before, just with a new owner behind it. All bank accounts, contracts, leases, and historical liabilities transfer along with the entity.
For sellers, this is generally the cleaner path. It uses simpler documentation, and the proceeds are typically taxed as capital gains (which is usually favorable).
Asset Sale
In an asset sale, the buyer doesn’t actually buy the LLC business. Instead, the buyer purchases specific assets from the business. These can be physical assets like buildings, equipment and inventory, and they also can be non-tangible assets such as intellectual property, copyrights, branding, and customer contracts. The actual LLC business stays with the current owner, as there is no transfer of membership interests.
Documentation for an asset sale is more extensive, since every asset is individually identified, valued and transferred. The tax implications for sellers typically aren’t as favorable. Each asset sold is taxed according to the type of asset, and some of the transfers might be taxed as ordinary income rather than at the lower capital gains rate.
After an asset sale is completed, the LLC is often either restructured or liquidated. It’s kept as-is only in select cases.
Many buyers prefer an asset sale, as they can cherry-pick which assets they want without taking on unknown liabilities. The liability of a limited liability company stays with the business, which doesn’t get sold.
Note: Neither of these types of LLC sales fits all situations. Consult with a qualified accountant and a qualified attorney, who can make a recommendation for your particular LLC sale.
Full sale vs. partial transfer
Your LLC sale will also be either a full sale or a partial transfer, depending on whether all members are selling their full interests in the business.
- Full Sale: All members exit the business, and full ownership transfers to one or more new parties. If you’re the only business owner and sell the business, it’ll be a full sale. Same if you and partners all sell out.
- Partial Transfer: At least one member retains at least some of their interest in the LLC. In other words, not all ownership of the business gets transferred.
- Most partial transfers fall into one of two common situations. First, one member wants out, and thus sells their full interest. They might exit due to retirement, divorce, death or simply to pursue other opportunities. Second, current members want to bring on another owner, and thus each sells a portion of their interest to the new member. The new owner might bring expertise, additional capital, or other resources to the LLC.
In multi-member LLCs, any partial transfer normally requires the approval of all other members. Specifics like this are governed by your LLC operating agreement.
How do I value my LLC?
Any LLC’s value is based on the business’s assets (tangible and intangible), current earnings, and projected future earnings. These hopefully amount to more than what has been poured into the business. Using these three main data points, there are a few different ways to value your LLC:
- Asset-based valuation focuses on the net value of what the business owns, assets minus liabilities. This approach is most common for asset-heavy businesses like manufacturing or real estate holding companies.
- Income-based valuation looks at revenue or cash flow and applies a multiple to it. This is the standard approach for service businesses, where the value lives in earning power rather than physical assets.
- Market-based valuation compares your business to similar companies that have sold recently, the same way a real estate agent prices a house using comparable sales.
The valuation method that’s to be applied could already be stipulated in your LLC’s operating agreement. It’s a judgement call, and potential point of debate, if the valuation method isn’t already stipulated.
Establishing an accurate valuation is especially important when selling a multi-member LLC, and doubly so during a partial transfer sale. The valuation directly impacts what each member’s interest in the business is worth, and thus what they pay or receive during the sale. Unsurprisingly, this is perhaps the most common point of friction when selling a multi-member LLC.
Because valuation requires both knowledge and wisdom, it’s highly recommended that you seek help from someone who’s valued businesses similar to yours before. Look for a CPA or a business broker for assistance.
How to sell an LLC: the process
Once you have decided on a framework and established a valuation, you can initiate the formal process of selling an LLC. While every transaction has unique nuances, a standard LLC sale moves through seven sequential phases.
Step 1: Review the operating agreement.
The operating agreement governs who is allowed to buy in, whether remaining members have a right of first refusal, and what approvals are needed before a transfer is valid. If your LLC has no operating agreement, or its agreement has no buy/sell provisions, your state’s default LLC laws apply instead. A well-written operating agreement keeps things straightforward.
Step 2: Get professional advice early.
Bring in a business attorney and a CPA from the start, not at the end. The legal and tax implications of an LLC sale are significant enough that attempting one without guidance creates real risk. It’s worth hiring these professionals if you’re serious about selling.
Step 3: Get a business valuation.
Hire a professional to complete a business valuation. A professional will know which methodology is most suitable, and how to apply that valuation. They’ll provide some authority behind the valuation as well.
If you’re involved in the partial sale of a multi-member LLC, consider hiring your own attorney, accountant or broker for this step. You’ll want your own team if there are disagreements over how much the business is worth.
Step 4: Find a buyer and negotiate terms.
If you don’t have a known buyer, work with a business broker who can help find qualified potential buyers. The buyer may already be known if you’re selling to an existing member, family or a known investor. You’ll still need to negotiate terms regardless.
Broad terms are frequently summarized in a non-binding letter of intent (LOI). This outlines the gist of the purchase as it’s been negotiated thus far.
Step 5: Draft a purchase agreement.
A purchase agreement is the formal, legally binding contract that executes the sale. It states the sale price, payment terms, exactly what’s being transferred, and any warranties or representations each side is making. Any other pertinent details should be spelled out in the purchase agreement, too.
The purchase agreement will be either a Membership Interest Purchase Agreement (MIPA) or an Asset Purchase Agreement (APA), depending on the type of sale. All members typically need to approve and sign.
Step 6: File required state documents.
Depending on the state, you may need to file an amendment to your Articles of Organization or a similar document, usually only if the transfer changes a manager or managing member named in your original filing. Many states, including Delaware, require no state filing at all for a straightforward membership transfer; check your state’s specific rules. In a membership interest sale, the operating agreement should also be updated to match the LLC’s new ownership structure.
Step 7: Notify required parties.
Several parties have to be notified of the change: IRS (Form 8822-B), banks, lenders and the registered agent (if not a member). Update vendors, customers and others as appropriate. You might also need a new EIN, depending on how the sale is structured.
What happens when an LLC is sold?
Several things change once an LLC sale closes. Ownership and control pass to the new owner. The operating agreement is updated to reflect the new membership structure, forms are filed to amend state records, and banking and financial accounts are transferred or updated.
If you’re executing a full sale as the seller, you’re entirely done once the sale closes. Every right, responsibility, and liability tied to the membership interest shifts to the buyer.
You’ll have to pay tax on any net proceeds from the sale. Proceeds are usually taxed at capital gains rates if a membership interest sale. An asset sale could be partially taxed as capital gains, and partially taxed as earned income. A CPA can check the exact tax implications of your sale.
When an owner exits a multi-member LLC, they’re issued a Schedule K-1 from the business. This reflects their share of income up to the transfer date. A CPA can prepare this document.
What to do before you sell
Seeing to a few simple details can make the process of selling your LLC go more smoothly:
- Update the operating agreement if it doesn’t have a buy/sell provision.
- Organize financial records and ensure bookkeeping is up-to-date.
- Take care of any overdue reports, unpaid franchise taxes or other outstanding matters.
If you’re forming a new LLC at the same time, Tailor Brands can help create a solid foundation. Get help drafting an operation agreement that has all relevant provisions, get an EIN and a registered agent, and set up compliance tracking. These are the details that can make selling a little easier when the time comes.
Conclusion
Many business owners have successfully sold their LLCs, and you certainly can too. Selling an LLC is a structured process. You just need to know the steps, how to prepare, and when to seek some help, earlier is always better. Here’s to the successful sale of your business.