When transferring ownership interest in a Florida limited liability company, it is important to follow the legal, financial, and regulatory requirements by complying with governing documents, state laws, and tax regulations. While this process can be tedious and time consuming, consulting with a legal professional here at EPGD Business Law can make this process smooth and legally sound while alleviating the stress that comes along with legal transitions.
What is the Transfer of Ownership Interest?
Transferring full ownership interest occurs when a member completely exits the business by selling their entire membership interest to another party. Ownership interests can be divided into economic rights that come with profits and distributions, voting rights, and management rights. Thus, it is important to determine exactly what rights are being assigned in the transfer, know what type of business structure you are under, and ensure the agreement reflects the intended structure and transfer.
What Do I Need to Know Before Transferring My Ownership Interest?
Transferring business ownership interests can be accomplished in many ways and the specific process will vary depending on the business’s structure. Relevant Florida statutes, such as Florida Statute §608.432, govern these transfers.
All Florida limited liability companies should have operating agreements that outline how to transfer ownership interest, and before transferring, one should carefully review the operating agreement at hand. These operating agreements will include exactly how a business interest transfer must occur, which can vary depending on the entity structure and agreements made by the members. The guidelines included in these agreements are legally binding and must be followed for the transfer to be valid.
Once the operating agreement has been reviewed, you will likely need to get approval from the other members. Typically, a majority or unanimous vote is required. Moreover, some operating agreements may include a Right of First Refusal, where before selling interest to an outside party, a member must offer it to existing members at the same price.
Additionally, operating agreements can include drag-along or tag-along rights. Drag-along rights allow majority shareholders to compel minority shareholders to sell their shares in the event of a company sale, favoring the majority by ensuring a complete transaction and preventing minority shareholders from blocking the deal. Conversely, tag-along rights primarily benefit minority shareholders by allowing them to participate in the sale on the same terms as the majority, preventing them from being left with a new majority shareholder.
Under some operating agreements, specific transfers may even be prohibited to specific types of buyers, such as competitors or individuals who do not meet eligibility criteria.
How to Transfer Ownership Interest?
- Review the operating agreement.
- Obtain consent from existing owners.
- Determine fair market value of the relevant ownership interest.
- Draft legal agreements and file necessary forms.
Legal Considerations of Transferring Business Entities
Proper Documentation: Without proper documentation, unauthorized transfers can lead to expensive legal disputes and even force a member to buy back their interest.
Tax Implications:
- Capital Gains Tax: If the membership interest is sold for more than the seller originally invested, the seller may owe capital gains on the profit.
- Gift Tax: If a member transfers interest to a family member or friend without receiving full market value in return, the IRS may classify it as a taxable gift.
- Loss of Tax Deductions: If the new owner isn’t actively involved in the business, they may lose access to certain pass-through tax deductions, if relevant to the entity structure.
- Reclassification of the entity: If the transfer changes the number of owners, the entity’s tax status may change.
- New Tax Allocation: If a new majority owner takes control, the entity may have to re-file tax documents with the IRS.
- Liability for Old Tax Debts: If the departing entity member did not settle their taxes, they may remain liable for the residual debts.
Future Liability: Even after a valid interest transfer, the original owner may remain liable for business debts or obligations unless explicitly released. Thus, to mitigate such risks, those transferring ownership interest of a Florida limited liability company should work with a business lawyer to structure the transfer in a way that eliminates future liability and ensure operating agreements are updated to reflect the ownership change.
If you would like to learn more about the legal implications of transferring the ownership interest of your limited liability company in Florida, do not hesitate to contact one of our experienced business attorneys at EPGD Business Law. With offices in Miami, Florida, we are ready to assist you. Call us at (786) 837-6787 or email us to schedule a consultation.
