How to Buy an LLC
To buy an LLC, you’ll need to pay an agreed-upon price to the current LLC member(s) and have all the membership interest transferred to you. Owning a limited liability company, or LLC, provides you as the owner liability protection while offering flexible business tax classifications. Instead of going through the hassle of building an LLC from the ground up, you can buy an already functioning and financially stable business. We’ll take you through everything you need to know to buy an LLC.
Steps to Buying an LLC
1. Due Diligence for Buying an LLC
Due diligence is the term used to describe doing research on an LLC you want to buy. This is the stage where you will dig into the LLC’s finances and history for any issues like outstanding debts, liens on property, or bankruptcy reports. You’ll likely want to get an attorney and accountant involved during your due diligence phase. Many attorneys will draft a checklist of actions and documents for the seller.
During the due diligence stage, you’ll want to request and review:
- Loans the business has taken out, even if they have been paid off
- Tax returns from all previous years
- Office or property leases that may still be in effect
- Internal documents like operating agreements, employee handbooks, and meeting minutes
- Articles of Organization and annual reports filed with the state
- Financial records and books related to salaries, investments, bank accounts, and credit cards
- Contracts for officers, employees, independent contractors, and other vendors or workers
- Copyrights or trademarks the LLC may have on record with the state or federal government
During your due diligence, you might start getting a sense of what the LLC is worth. Some folks will hire a business appraiser or an accountant to help. With their guidance, you can begin making negotiations on a fair market price. All members of the LLC will also need to have any buy-sell agreements checked for stipulations around the sell of the business. You can find out what restrictions members have in the internal records of the LLC. Written agreements from the members of their acknowledgment of the potential sell can also be gathered at this stage.
Determining LLC Value
Determining an LLC’s value can be tricky. If you’re not sure where to start, you might want to get a CPA or business appraiser involved before you begin negotiating the purchase price of the LLC you’re interested in buying. Your appraiser will review the financial history of the company and provide you with a fair market value for the LLC and notify you of any red flags or issues that may affect the price. Determining the value and debts of an LLC comes down to looking at a lot of the information you’ve already gathered:
- Loans taken out by the LLC
- Credit cards and financial reports current and past
- Leases the company has either taken out or is leasing to another individual
You’ll also need to check the buy-sell agreements for the members of the LLC to see how the LLC handles selling or transferring member’s interest. You’ll find the buy-sell agreements in the LLC’s operating agreement.
2. Transferring Membership Interest
Once you’ve come to an agreed upon price for buying the LLC, you move into the stage called the closing. The closing is where you and the seller go over the term sheet, sign the purchase agreement, and finalize transfer of LLC interest and ownership.
The LLC’s operating agreement will outline what methods or steps need to be taken to transfer member interest and LLC ownership into your name. If the LLC doesn’t have an operating agreement, refer to the state’s Limited Liability Company Act for the state requirements and laws for transferring LLC ownership. In most cases, you’ll need to get a vote from all the members to approve the sale. If you didn’t get this during your due diligence stage, you will need to get member approval during the close.
A buy-sell agreement (sometimes called a buy/sell agreement, buyout provision, or buy/sell provision) is an internal document that outlines how members in an LLC can be bought out or how they can transfer ownership in the case of a buy-out or other event. In most cases, the members of the LLC have already valued the LLC and assigned a sales price to each member’s interest in the company. The buy-sell agreement will also list any restrictions to the transferring of interest, but if you and the members agree to change them, they can be amended by the members before sale to reflect any new or additional agreed-upon terms.
Once you get full ownership of the LLC, you will have the power to amend or even create a new LLC operating agreement. We recommend at least updating the information in the operating agreement that has changed in the transfer of ownership.
The term sheet, sometimes called a memorandum of understanding, is the document containing all the key agreed upon information about the purchase of the LLC. This, unlike your purchase agreement, is not a contract and is only a list of key info related to the sell and transfer of ownership. Your term sheet will include aspects like:
- Final price you’ll pay for the LLC, when it’s due, and the method of payment
- Outline of LLC’s structure and operation
- Membership approval gathered
- Date of closing on the purchase
- Non-compete agreements or other contractual obligations
You’ll want to have an attorney draft and review your term sheet because it will be used to draft your purchasing agreement, which is the official legal document of your LLC purchase.
A purchase agreement is the legal document you’ll use to finalize the purchase of an LLC. Once you’ve completed your term sheet and your due diligence process, you’ll craft a purchase agreement. If you’re buying the entire LLC, you’ll draft a full purchase agreement. If you did not get all member approval during your due diligence, you’ll get all member approval of the purchase agreement and transfer of ownership during this stage.
The term sheet you drafted will be the main items included in your purchase agreement, but there will also be information about post-purchase protection like when any final debts must be paid and agreements with landlords settled. Once the purchase agreement has been drafted and agreed upon, your attorney will provide the LLC with a list of actions and items they need to complete before signing the agreement.
After all parties and their attorneys have signed the purchase agreement, the closing is done and you’ve successfully purchased an LLC. You’ll still need to give post-closing notifications to the government and IRS to let them know of the change in ownership, registered agent, and any other important information that has been changed during the purchase.
Local Government and Secretary of State
When you purchase an LLC, you’ll need to update the government about the change in ownership and, in some cases, membership and registered agent. You’ll file an amendment to your Articles of Organization, sometimes called Certificate of Organization, with the state where your LLC is located. Business licenses and permits will also need to be updated with local and state boards where the LLC is registered.
Learn more about How to Get a Business License.
With a change in ownership after a purchase of an LLC, you’ll need to file Form 8822-B, Change of Address or Responsible Party. Form 8822-B updates the IRS to a change in who the person of contact is assigned the EIN for the business. If you want to change your LLC’s tax election, you’ll need to file Form 8832 with the IRS. When buying a single-member LLC (SMLLC), you won’t need to notify the IRS if it is staying a SMLLC. However, if you purchase a SMLLC and change it to a multi-member LLC, you’ll need to file for a new EIN.
Learn more about updating the IRS to a change in LLC membership.