How to Sell a Percentage of an LLC

Selling a percentage ownership in your limited liability company has significant consequences for the management of your business. An LLC is formed under state law and managed like a partnership. Under the law, all LLC owners, known as members, have an equal right to participate in the management of the company. When you sell a percentage of your business to an outsider, you are taking on a partner who becomes your equal in authority, even if you retain a majority percentage of the ownership interest in the company.

In most states, an LLC can add new members to the company only with the unanimous consent of the existing members. An LLC's ownership structure requires 100 percent of the ownership of the company to be allocated to existing members. If a new member buys into the company, his ownership percentage must come out of the percentages that existing members hold.

Under the law, no member is required to accept a devaluation of his ownership interest without his consent. So the first step in selling an ownership percentage in an LLC is to obtain the consent of all existing members to the sale.

The next step in arranging a sale of an ownership interest in an LLC is to set a value on the ownership percentage. It is often difficult to determine the value of a closely-held company because ownership interests are not bought and sold on the open market like shares of stock in a public corporation. The existing members will likely want the buy-in price for the new member to at least proportionally equal the contributions that they have made to the company.

Business valuation experts and accountants can help determine the additional value of an ownership interest in the company using cash flow analysis and other economic models to set a higher buy-in price than what the existing members originally contributed.

Once the terms of the sale have been negotiated, a written membership interest sales agreement should be drafted to contractualize the transaction. This agreement should not only detail the new member's ownership percentage and the amount of the buy-in, it should also require the new member to agree to be bound by the LLC's existing operating agreement. An LLC's operating agreement is the contract between members that sets management parameters.

This agreement can contain important provisions that affect the new member's rights as an owner. For example, an operating agreement can prevent members from selling their interests to third parties without first offering the interest for sale to the other members at a set price. An attorney can assist to ensure that the agreement correctly reflects the parties' wishes.

Selling a percentage of your LLC to a new member requires you to update the company's operating agreement, adding the new member to the list of existing members and changing the relevant ownership percentages. A capital account should be created for the new member in the company's accounting system. Finally, if the addition of a new member changes the LLC from a single-member LLC to a multiple-member LLC, you must change the company's tax status with the Internal Revenue Service IRS by filing form 8832 and choose a tax structure that is appropriate for an LLC with multiple owners.