Transferring LLC ownership in Pennsylvania requires knowing state regulations. Our guide below takes you through key steps for a smooth transition, providing essential knowledge for a successful transfer.
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Your limited liability company (LLC) has likely taken many years of hard work and paperwork to get off the ground. Now that you’ve figured out how to start and run your LLC, what happens when you want to sell it, or at least your interest in that LLC? Here, we’ll discuss some of the most common ways you can use to transfer ownership in a Pennsylvania LLC, and how ZenBusiness can support your goals.
Need to form your LLC first? Head over to our Pennsylvania LLC formation page for more information.
Corporations and LLCs have very different ownership structures, which means they have different requirements for the transfer of ownership. Shareholders own a corporation. They can freely buy and sell their shares/ownership interest, unless corporate bylaws or agreements choose to restrict transfer. A corporation can also buy back its own shares from shareholders.
It’s easier to start an LLC because less information is required, but when it comes time to transfer ownership, LLCs are more complex than corporations. An LLC member’s financial interest in the business is easily transferable. But effectively transferring full ownership rights requires compliance with the LLC’s Operating Agreement or stringent rules under Pennsylvania law.
Your best option for easily transferring LLC ownership is to write an Operating Agreement (OA) with transfer provisions for LLC owners. An Operating Agreement (OA) is a document with customized provisions dictating how an LLC conducts business. Your OA can determine how to transfer ownership of an LLC in Pennsylvania.
If your LLC has an OA with transfer provisions, just follow those provisions to transfer ownership. Some states require your LLC to have an OA, but several don’t. Pennsylvania law doesn’t require you to have an OA, but having one is ideal. With an OA, your LLC can choose the most fitting way to transfer ownership. If your LLC doesn’t have an OA with transfer provisions, you have to rely on Pennsylvania law to transfer ownership.
The hardest part of writing an OA is knowing where to start. For a useful kickstart to your writing process, you can use our Pennsylvania Operating Agreement template to help you draft the right document that suits your business’s needs.
If you want to sell LLC interest without legally dissolving it, you can either do a partial sale (known as a buyout), or a full sale of the business.
An individual member can transfer their ownership interest back to the LLC if they want out. The other LLC members can make a deal to buy back the interest and split ownership among themselves. Under Pennsylvania law, a member can voluntarily dissociate by giving notice to the LLC of their intent to withdraw. Within a reasonable time after dissociating, the member can receive the fair value of their membership as compensation.
Members can also freely transfer their financial interest in an LLC to a third party. However, they cannot freely transfer full membership that includes the right to conduct the company’s affairs or access information. Under Pennsylvania law, if a transferee of an LLC interest wants to become a full member with ownership rights, all the members of the LLC must consent.
With transfers of ownership, it’s important to have a buy/sell agreement that covers the purchase and sale of interests to reduce the likelihood of confusion and conflict. Including buy/sell provisions in a comprehensive and detailed OA is your best protection against member discord or dissatisfaction.
An LLC can fully transfer ownership by selling the entire business, or selling just the business assets. To fully transfer LLC ownership in Pennsylvania, you need to follow the provisions in your OA or follow Pennsylvania law. If you don’t have OA provisions covering this kind of sale, all members must agree to the full transfer of the LLC. Selling your LLC can be a complex process. It’s a good idea to consult an attorney to help ensure that you conduct the sale properly.
There are some situations in which tragedy or stress could be the reason you need to sell a business. The most commonly faced issues are as follows.
A member’s financial interest in an LLC is their personal property. And just like all personal property, if an LLC member dies, their financial interest typically passes to their heirs. But an heir cannot become an LLC member (owner) unless the remaining members unanimously consent. The remaining members can also enter an agreement to buy out the heir’s financial interest. This is usually the best option. Otherwise, their heirs receive only the right to receive distributions (profits) from the LLC.
Sometimes a do-over is your best option for transferring ownership in an LLC. You can achieve this by dissolving the LLC and allowing members to start new businesses with whomever they please. LLCs can dissolve with the consent of all the members. After winding up the LLC’s affairs, the LLC must file a Certificate of Termination with the Department of State.
As stated above, sometimes a change of LLC ownership requires you to file paperwork with the Pennsylvania Department of State. A Certificate of Organization doesn’t require you to name members. But, if the contents of your LLC’s Certificate of Organization change because of a transfer, an amendment, correction, or restatement needs to be filed with the Department of State. You may also need to file paperwork with the IRS to reflect change of ownership. You don’t want to miss these steps when making changes to your LLC.
You want to take advantage of anything that can make your professional life easier. An Operating Agreement is a great way to simplify the running of your LLC because it gives everyone a playbook for how to handle different issues and reduces the likelihood of conflict. Our Pennsylvania Operating Agreement Template provides a helpful roadmap for how you can put your LLC’s game-winning plays into writing.
You can sell your interest in LLC distributions, but you can’t sell your ownership interest. The purchaser can’t be an LLC member without unanimous member consent.
An LLC that has an Employer Identification Number and changes ownership needs to file Form Form 8822-B with the IRS to let it know about changes in business address, business location, and responsible party. The LLC has only 60 days to report a change in responsible party. The IRS normally takes four to six weeks to process changes.
Generally, all LLC members are owners who have rights to make decisions for the business and receive distributions. A member can freely transfer their interest in distributions to a third party, but they cannot freely transfer their right to participate in business decisions.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Written by Team ZenBusiness
ZenBusiness has helped people start, run, and grow over 700,000 dream companies. The editorial team at ZenBusiness has over 20 years of collective small business publishing experience and is composed of business formation experts who are dedicated to empowering and educating entrepreneurs about owning a company.
