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Consultant’s Corner: Transferring Business Ownership to a Spouse

Transferring Business Ownership to a Spouse header

Q. I am currently the sole member of an LLC. I would like to transfer sole ownership of the LLC to my spouse. How would I do this?

The transfer of the LLC ownership to your spouse will have to be properly documented for legal and tax purposes. In addition to the proper legal documents between the parties, there are governance, taxation, regulatory, and other potential important considerations. Also, due to the general complexity of business and tax regulations in these transactions, you will likely need to consult your lawyer and local business tax advisor to consider all of the issues, determine the most effective structure for the transaction, and identify all of the necessary paperwork: LLC governance, state filings, tax filings, etc. For consideration with your local advisors, we have provided the following information, resources, and considerations:

1. Business valuation

We do not know the value of your business. However, if you sell the business, you would have potential personal income tax considerations: ordinary income and capital gains tax. However, when gifting an LLC ownership interest to family members, an accurate valuation of the business is generally important in order to establish a value for gift tax and other financial and income tax purposes. Also, business owners often need to engage or consult professional business brokers or local financial professionals to provide an independent appraisal or otherwise help them value their businesses. Certain industries have rule of thumb valuation factors, such as a multiple of revenues, cash flows (EBITDA), or net income. However, industry guidelines vary based on profit and cash flow potential and cannot always be applied to an individual situation because of asset values, rent and labor costs, financing, and other elements unique to that operation. Establishing the value of a business generally involves determining a) the value of the equipment, supplies inventory and other tangible assets and b) the value of the business customer list/contracts, sales/profit potential, and intangible assets like goodwill, etc. Also, the quality of your customer list and relationships may be a valuation factor. Historical operating results are one part of the valuation; however, businesses are generally valued more for the future potential than the past operations.

As to valuing a particular business, the best information generally involves determining the present value of future cash flows. The key financial statement is the statement of cash flows that will yield the “cash available to service debt.” The future cash flows are then discounted to present value using a discount rate that reflects the amount of risk inherent in the forecast assumptions. The key question is “How much would someone pay for the opportunity to earn $xxx of annual income.” The answer generally depends on how secure the income is and how easy it would be for the buyer to start from scratch without buying the business. If the business has growth potential, it may be worth 10 to 20 times earnings compared to 3 to 7 times earnings for a company with limited, or no, growth potential. Service businesses may sell from 40% to 150% of revenues, for example. Also, a consideration with a personal service business owned by one or only a few individuals is the value of the customer relationships and/or contracts.

Your local CPA can assist you with a business appraisal and provide you with a fee estimate. For discussion with your CPA, you can review discussions of the common valuation methods at the following websites:

http://www.bizfilings.com/toolkit/sbg/run-a-business/exiting/use-best-business-valuation-formula.aspx

http://www.business-valuation.net/methods/

Also, for comparison purposes, you can review other businesses for sale at Internet websites like the following:

http://www.bizbuysell.com/

http://www.mergerplace.com/business-for-sale/search

2. LLC ownership transfer agreements

Business interests (entire or partial) are customarily transferred to family members, including spouses, through a sale, gift, or inheritance, all three of which can have legal and tax implications. Generally speaking, transferring membership interests, or membership certificates in an LLC from one family member to another involves either a sale or a gift of the membership certificates from one party to the other. In a sale, the selling family member would sell his or her membership certificates to the buying family member in an arms-length transaction based on the fair market value of the membership certificates. In a gift scenario, the gifting family member (donor) would transfer his or her membership interest to the recipient (donee) by formally transferring title to the membership certificates to the recipient. Both membership certificate sales and gifts can have income or gift and estate tax implications depending all the facts and circumstances.

As to documenting the addition of an LLC member, the required documents can vary depending on the structure of the transaction and regulatory requirements. For consideration with your lawyer, you review the sample LLC membership interest sale/purchase agreements and LLC membership interest subscription agreements and other paperwork that may be applicable to your situation:

LLC interest sale:

http://www.northwestregisteredagent.com/sell-llc-membership-bill-of-sale.html

http://www.leaplaw.com/pubsearch/preview/1193_LLCSubscrip.pdf

https://www.docracy.com/0v4et8ci8ka/membership-interest-purchase-agreement

LLC Operating Agreements:

http://www.northwestregisteredagent.com/single-member-llc-operating-agreement.html

http://www.nolo.com/legal-encyclopedia/llc-operating-agreement-30232.html

http://www.ilrg.com/forms/st_businessventures.html

http://www.uslegalforms.com/corporatecenter/llc-operating-agreements.htm

Amendments:

http://www.northwestregisteredagent.com/llc-operating-agreement-amendment.html

https://www.leaplaw.com/pubSearch/preview/1080D_OperatingAmendment.pdf

LLC Membership Certificates:

http://www.northwestregisteredagent.com/LLC-membership-certificate.html

http://www.mycorporation.com/corporation-llc-documents/llc-membership-certificates.jsp

3. Minute book

It is generally advisable for LLCs to have minutes to document the change of ownership, Board of Director elections, officer elections, bank account authorization, and other decisions regarding major contracts and important business issues. The GoSmallBiz membership includes the GoSmallBiz Corporate Minute Writer tool which simplifies the task of keeping your business Minute Book. GSB members can find the Corporate Minute Writer tool through their GSB Account under Applications then Corporate Minute Writer.

4. Taxation

Your personal tax implications will depend on the structure of the transfer: sale or gift. Transfers or conveyances of LLC ownership between spouses will have gift and estate tax implications; however, depending on the fair market value of the conveyed interest, your lifetime gifts, and other factors, the conveyance may not create gift or estate tax liabilities. For example, a gift is not includible in the gross income of the recipient, or donee, of the gift; however, gifts exceeding the annual exclusion for gifts ($15,000 in 2020) may be subject to gift tax, which is the responsibility of the maker, or donor, of the gift. Whether a gift is subject to gift tax will depend on the donor’s total lifetime gifts. Under current tax law, gifts made that exceed the annual exclusion for gifts are only subject to gift tax when they cumulatively exceed the donor’s lifetime gift tax exclusion amount which is $11,580,000 in 2020. Even if a gift is not subject to gift tax, if the gift exceeds the annual exclusion for gifts, the donor would still need to file a gift tax return (Form 709) for the year of the gift. You can review IRS information on estate and gift taxation at the following websites:

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Whats-New-Estate-and-Gift-Tax

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-and-Gift-Taxes

Investment gain and loss taxation:

https://www.irs.gov/publications/p550/

https://www.irs.gov/taxtopics/tc409.html

5. State filings

You may have state filings related to changes in the agent of service or other aspects of your LLC. Documents reflecting changes in existing businesses can be filed online at the Secretary of State’s website.

6. Professional assistance

Due to the various governance, legal, financial, and tax implications when transferring LLC ownership, business owners generally use local professionals (CPA, lawyer, and business insurance agent) for help in reviewing their ownership transfer plans and goals and evaluating transaction structure, regulatory requirements, taxation issues, and any risk management issues.

Bill Wortman

Bill Wortman

Protecting Your LLC: How to Transfer the Rights to a Family Member

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Transfer your interest in an llc to a family member, transcript:.

Jonathan : Hi, my name is Jonathan Barlow. I'm a partner attorney at Clear Counsel Law Group. We handle estate planning and we handle business planning. The question we have today that I'm going to answer blends these two areas in one question. The question is, how can I transfer an ownership interest in my LLC to a family member? There's basically two times that you might think about a transform happening. One, while you're alive, and two, after you pass away.

First, if you think about wanting to transfer an ownership interest while you're alive, I highly recommend that you do this as formally as possible to make it very clear that you did both intend to transfer the interest and that you actually did transfer the interest. That can be done formally through a simple document. We call it an assignment of ownership interest. In that document, you simply recite that you are an owner of the business in such and such a percentage, and that you hereby or give such and such as percentage or amount to the person you want to give it to. Sign it, date it, have it notarized. That actually acts as a formal transfer of ownership interest. It formalizes it and makes it very clear what your intent was.

After you pass away, if you have an intent to transfer the interest after you have died, you want to make sure you also do that very formally. You could that either in a will or in a trust . If you do it through your will you're probably going to have to ... or your family member will have to go through probate in order to get their interest in your business, which could delay the operation of the business while that process is happening. The best way to plan for an after-you-die transfer is through a trust.

In your trust, just like any other asset, you can specifically list 25% of my business or half of the business or all of the business to be transferred to my son John when I pass away. That can happen pretty easily and quickly after you die through the use of a trust. Those are the two best ways to do that and transfer those ownership interests. Brian has a question about this.

Brian : What happens to your LLC if it goes into probate?

Jonathan : That's a good question. If the LLC, which becomes an asset of your estate when you die and in order to get it transferred out of your estate to whomever's going to inherit it, it goes through probate, what happens to the business? That's an interesting question. If there's not already other business managers operating the business, if the person who passed away is the only manager, the personal representative or executor of the estate can be appointed with authority to continue the business of the LLC. The court would grant that person, the executor, authority to step in the shoes of the manager of the business and continue with the operations of the business while the probate is occurring until it is transferred out of the probate estate to the heirs.

That may or may not be a good idea. That's also a reason why you want to think about using a trust to avoid that potential process. Because that executor may not have the business acumen that you would want them to have in order to operate your business. Thus again, using it through a trust allows you to be much more formal and specific about how you want that ownership interest to transfer, and the management interest as well. If you have questions about your LLC, about your ownership interests, how to transfer those, I encourage you to give me a call or any of the attorneys here at Clear Counsel Law Group, and we'll do our best to answer your questions.

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LLC Transfer of Membership Interest

(This may not be the same place you live)

  Who Has Ownership in an LLC?

A limited liability company (“LLC”) is a type of business formation that combines the limited liability benefits of a corporation with the tax advantages of a partnership. An LLC may be formed by one or more business owners. Business owners in an LLC are referred to as “LLC members.” Each LLC member will own a certain percentage of the business. The percentage they own is called an “interest” or a “share.” 

It is important to note that a member-owner does not need to maintain an interest in the company. In general, members are usually granted the right to sell, purchase, assign, and/or transfer interest in the LLC. 

To learn more about their rights, members should consult the LLC’s operating agreement, other contracts, and applicable state laws. In some cases, an operating agreement may name specific LLC members or appoint managers and officers to authorize transfers of LLC interests.

Finally, if you have questions regarding the rights of LLC members or need assistance transferring your interest in an LLC, you should contact a local business attorney for further advice. An attorney will be able to answer any questions you have about a particular legal issue and can help you navigate the transfer process. 

Why Would I Transfer My LLC Interest?

Do i have to transfer all of my llc interests, can i just transfer my interest, what if my llc operating agreement doesn’t have a section address the transfer of interest, will i need the approval of other members to complete the transfer, do i need to talk to a business attorney about an llc transfer.

There are a number of reasons why a person would want to transfer their LLC interest. Some of the most common reasons include:

  • All the members want to sell or dissolve the entire company;
  • An individual member wishes to leave the business;
  • A current member wants an outside individual to join the business;
  • A member dies or becomes incapacitated; and 
  • For financial or personal reasons (e.g., went bankrupt, got divorced, lost outside income from another job, wants to donate their interest to charity, and so on).

The procedure to transfer an LLC interest will depend on the provisions contained in an LLC’s operating agreement, related company documents, and state law. Thus, these procedures will vary widely across all LLCs. Most LLCs tend to create an operating agreement to ensure that their business runs smoothly and to protect them against future liability.

Using this default as an example, the procedure to transfer an LLC interest is as follows:

  • First, identify the necessary steps to transfer an interest. Review company contracts, state laws, and any other paperwork. Check for guidance on any restrictions, when member approval or a vote is necessary, whether members have a right of first refusal, the types of transactions that are freely transferable, and so forth.
  • Next, determine what percentage will be transferred and the value of that percentage. Confirm with other members that these numbers are accurate.
  • Complete the transfer process by complying with the guidelines found in state laws and company agreements. This step will change significantly for each LLC since there are no uniform requirements.
  • In some cases, a member may need to obtain or draft a transfer document. However, not every transfer will need one. For example, if state law requires it or a member is assigning (not selling) their interest, then they may need to draft or get a transfer document. A transfer document simply provides details about the transfer (e.g., member name, percentage of interest transferred, etc.). 
  • Finally, if a member is unsure whether all steps were satisfied, then they should consult a local business attorney for further advice. 

In general, LLC members can typically choose what percentage of their interest they want to transfer to another party. For example, they may decide to transfer half of their interest, some portion below or above half, or the entire thing. 

The only exception to this privilege would be if an LLC’s operating agreement, other company documents, or state law forbids the action or the transfer of a certain percentage. 

An LLC member cannot just simply transfer their interest to another party. First, they must check that there are no provisions in the LLC’s operating agreement and/or other company documents concerning the transfer process. 

If an agreement exists and it contains requirements to transfer interests in the LLC, then the selling member must strictly adhere to those procedures. They also should review state statutes for guidance on restricted transferability. 

In some instances, a member may need to create a written agreement in order to transfer their interests, such as if it is mandated by an operating agreement or an LLC member wants to assign their financial benefits (as opposed to selling their ownership rights). 

If no company documents specify whether an interest must be transferred through a written agreement, then this is when a member should consult state laws. Each state has its own regulations and requirements for transferring LLC interests, which means that these rules can vary considerably by state. Thus, while one state may invalidate a transfer that is not made through a written agreement, another might enforce it regardless of how it is done.

In general, it is strongly recommended that members of an LLC form an operating agreement. An operating agreement is a business document that outlines the various membership duties and internal functions of an LLC. Operating agreements are not required to register an LLC, however, so not every LLC may have one in place. 

As for the LLCs that do, they will be free to include any provisions that suit the needs of their particular business. Accordingly, operating agreements will vary by LLC. Furthermore, not all operating agreements will contain a section that addresses transferring the interests of an LLC. 

If an LLC operating agreement does not provide instructions for how members can transfer their interest in the LLC, then the next item to look for is a buy-sell agreement. A buy-sell agreement may be a clause in the operating agreement or a separate contract. In the event that neither of these documents exist and there are no other rules regarding transfers of interest, then the members must defer to applicable state laws. 

In addition, there are some other factors that can alter the transfer process. For instance, the reason why a member is transferring their interest (e.g., selling, gifting, assigning, etc.) and whether a transfer is being done voluntarily or involuntarily, can affect the process. Also, some types of transfers do not require the approval of other members, such as when an interest is transferred to someone within a member’s immediate family.

Lastly, the percentage of interest being transferred (e.g., partial or whole), the number of LLC member-owners, and whether the LLC or its members have a right of first refusal can impact this process as well. Members can also choose to amend the existing operating agreement or can create a separate buy-sell agreement with rules before a transfer occurs.

As briefly mentioned above, whether an individual member needs the approval of the remaining LLC members will depend on the terms of an operating agreement or buy-sell clause. Again, if neither of these guidelines exist, then LLC members must review state law requirements.

Other factors that will affect whether a member can transfer their interest without having to consult the rest of the members include the person receiving the interest, whether members have a right of first refusal in the interest, and if the state laws governing the transfer process contain restrictions regarding transferability.  

For example, a member who transfers their interest in an LLC to an immediate family member most likely will not need the approval of the other members. On the other hand, if an operating agreement grants its members a right of first refusal, then the selling member must present the option to purchase their interest to fellow members before they can proceed with the transaction. This is especially true when members are attempting to dissolve an LLC.

Transferring ownership interests in an LLC can be a fairly complicated process due to the complexity of the laws and procedures that must be complied with for a transaction to be valid. Thus, if you have any questions about an LLC transfer or need assistance with transferring your interests in an LLC, it may be in your best interest to consult a local corporate lawyer for further legal guidance.

An experienced business lawyer will be able to give you answers tailored to your specific issue and can identify which laws and contract provisions will apply to your transaction. Your lawyer can also review and explain the operating agreement along with the other LLC documents to ensure that you understand your rights. 

In addition, your lawyer will be able to determine the risks and benefits associated with a particular transfer, can recommend alternative options if they believe a transaction is too risky, and can offer general business advice. 

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transfer of llc interest to spouse

How to transfer ownership of an LLC

The process for transferring ownership of an LLC depends on the type of transfer as well as the provisions of your operating agreement.

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transfer of llc interest to spouse

by   Michelle Kaminsky, J.D.

Freelance writer and editor Michelle Kaminsky, Esq. has been working with LegalZoom since 2004. She earned a Jur...

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Updated on: March 21, 2024 · 2min read

What is a buy-sell agreement?

Buying out an llc member, selling an llc.

One of the advantages of having a limited liability company (LLC) is that even when sold, the business may continue on as before with a simple transfer of ownership.

How to transfer ownership of an LLC is a topic that is generally covered extensively in the LLC's operating agreement. When  forming an LLC , you likely signed an agreement that described how the business would function. Although this document is not required by law, most LLCs have them, and within them, you will find the exact process to follow when transferring ownership of your LLC.

Note that the process varies depending on whether the entire business is being sold or whether only the owner's names and percentage ownerships are changing.

Two woman talking business plans

A buy-sell agreement is an agreement documented in the operating agreement that outlines instructions for buying out a member of the LLC. Some specific issues covered include who may become an  LLC member , whether the business must buy back shares from a departing member, the distribution of the remaining shares, and the process for approval of the transfer.

The agreement should also address how the business and membership interests in it will be valued in the case of interest transfer. This valuation method must be followed or the LLC could face a lawsuit by the departing member and stiff penalties for violating its own operating agreement.

While specific provisions vary, if the LLC is buying out a member's share, ownership transfer entails valuing the business and member shares to determine how much the departing member's share is worth. Usually, this departing member's share is then bought out by the LLC, and often, the transfer also must be approved by other LLC members.

If your operating agreement doesn't specify the change of ownership process, you must turn to your state's law for guidance. Some states require the complete dissolution of an LLC if an operating agreement doesn't provide for an ownership transfer process. Because this process can be detrimental to your business, you should consider this factor when forming the LLC to better lay a path for down the road even if you don't anticipate interest transfers.

Unlike the valuation of the business for buying out an LLC member, your operating agreement does not require a specific business valuation method or process for selling an LLC. In that sense, you are on your own to find a buyer and agree on a price. Your buyer may want to purchase the entire business or only its assets.

Once you have reached the terms of the sale, you can memorialize the terms in a preliminary memorandum or change of ownership letter. When both parties are satisfied, you can move forward with a formal transfer of business ownership agreement, which is executed just like any other type of contract according to your state's laws.

Because LLC transfers of ownership can have far-reaching and long-lasting consequences to a business, the best practice is to document the process as clearly as possible within the operating agreement at the formation of the LLC. Making sure you have LLC ownership transfer provisions in place from the beginning can save you major headaches later, which makes sound LLC legal advice a smart idea from the get-go.

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transfer of llc interest to spouse

There has been considerable speculation that one consequence of the Coronavirus will be an increase in the divorce rate resulting from togetherness imposed by the quarantine that pushes marriages already on shaky ground over the brink.  Whether divorces will increase in the future due to Covid-19 remains an open question, but what is certain is that a sizable number of future divorces will involve the transfer of a business ownership interest between spouses as part of the divorce.  To address this situation, this post focuses on key business issues that arise when one spouse (the “Divesting Spouse”) transfers an ownership interest in a business to the other spouse (the “Recipient Spouse”) as part of a divorce settlement.  Addressing these issues will help the Recipient Spouse continue to run the business successfully and also avoid future conflicts with the Divesting Spouse, as well as with future investors and potential buyers of the business.

1. Don’t Rely on Divorce Decree or Settlement Agreement to Document  the Transfer of a Business Ownership Interest Between Spouses

A divorce decree and settlement agreement will document the terms of the divorce and the division of property between spouses, but it is not a good idea to rely on the decree or the divorce settlement to memorialize the transfer of a business interest between spouses.  There are a number of reasons for the Recipient Spouse to insist on securing a stock transfer agreement (or its equivalent), including the fact that the Recipient Spouse will likely be required to show the transfer document to third parties in the future, including banks or other lenders, new investors, company officers or managers, and potential future buyers.  The Recipient Spouse will not want to show the decree or settlement agreement to these third parties, however, because they include private matters unrelated to the business.  This will therefore require the Recipient Spouse to prepare a heavily redacted document for review by third parties.  It is more efficient to simply require a transfer document to be signed that is limited solely to issues related to the business.

Another reason for the use of a transfer document is that it will include many provisions that are not normally part of a settlement agreement.  The decree or settlement agreement will become a very lengthy document if it includes all of the provision that are traditionally set forth in a separate document that covers the transfer of a business interest.

2. Secure a Separate Release of the Divesting Spouse’s Claims Against the Business

After the business is transferred and the divorce becomes final, the Recipient Spouse will not want to defend claims that are brought by the Divesting Spouse against the business.  This requires the Recipient Spouse to secure a broad release of claims against the business from the Divesting Spouse.  This release of the business is separate from and in addition to the release that the Divesting Spouse provides to the Recipient Spouse, individually.

For example, if the Divesting Spouse was an officer, employee, director or manager of the company, the Divesting Spouse’s release needs to include a release of all employment claims, such as claims for unpaid wages/back pay, vacation time, unpaid expenses, and commissions.  The release will also include the Divesting Spouse’s release all claims for wrongful termination, claims related to the distribution of any profits generated by the company and all other business related claims.  The release will also confirm that the Divesting Spouse has resigned from all positions with the company and has no further right or authority to take any action for or make any statements on behalf of the company.

3. Confirm Broad Transfer of All Rights by Divesting Spouse

The provisions that confirm the transfer of ownership in the business by the Divesting Spouse need to be broadly described in the transfer agreement to include all rights, title and interest of every kind related in any way to the business.  This includes all rights of the Divesting Spouse in any and all intellectual property of the company, such as company names, trademarks, trade secrets and patent rights.  This is particularly important if the Divesting Spouse worked in the business, because the Recipient Spouse does not want to be faced with a situation in the future where the Divesting Spouse later claims that he or she developed some software, designs or other intellectual property rights that are not owned by the business, and which are now being used by the Divesting Spouse in direct competition with the company.

4. Consider Requesting Divesting Spouse to Accept Restrictive Covenants

In a normal M&A transaction, a company buyer secures a set of restrictive covenants from the seller as part of the purchase agreement to prevent the seller from competing in any way with the company after the sale takes place.  The buyer will require the seller to provide all of the following restrictive covenants that will last for two to five years:  (i) a covenant not to compete, restricting any involvement by the Divesting Spouse — whether as an owner, employee, consultant, etc., — in a business that is competitive with the subject business for a reasonable period of time within a reasonable geographic area, (ii) an agreement not to interfere with the business’s relationship with its customers and vendors or to solicit customers, or attempt to persuade the business’s customers and vendors to cease doing business with the company, and (iii) an agreement not to hire or solicit the hiring of any of the employees of the business, or otherwise attempt to persuade any of the employees of the business to cease their employment relationship with the company.

If the Recipient Spouse is concerned that the Divesting Spouse may compete in business against the company after the divorce, the Recipient Spouse may want to request the Divesting Spouse to agree to accept some or all of these restrictions.  The Divesting Spouse will not agree to accept these post-divorce restrictions, however, without a corresponding commitment from the Recipient Spouse to provide some amount of additional consideration in the divorce settlement.

5. Request Confidentiality Agreement from Divesting Spouse

Confidentiality agreements are similar to restrictive covenants in that they prevent the person who is subject to the agreement from taking actions that are harmful to the business.  The confidentiality agreement is specific, however, in prohibiting the individual officer or employee from using or transferring any of the company’s confidential information or trade secrets.  All of the company’s officers and employees are subject to a common law duty not to use or misuse any of the company’s confidential information, but a written confidentiality agreement makes this prohibition clearer on the use of confidential information and trade secrets.

If the Divesting Spouse has not already entered into a confidentiality agreement with the company, the Recipient Spouse will want to request the Divesting Spouse to accept and sign a confidentiality agreement to protect the company’s valuable confidential information and trade secrets.  The Recipient Spouse wants to make sure that the company’s confidential information, technology and trade secrets are maintained in strict confidence.

6. Secure “Tail Coverage” of Divesting Spouse From D&O Carrier

  If the company has a directors and officers liability insurance policy (a “D&O Policy”) that provides protection for officers and directors from third party claims, these polices will generally remain for one or two years after the company’s officers and directors are no longer affiliated with the company.  The Recipient Spouse will therefore want to secure “tail coverage” to provide continuing insurance coverage for claims made against the Divesting Spouse.  In this regard, the Recipient Spouse may want to secure a tail policy will extend the D&O coverage over former officers and directors for a total period of five years.

The Recipient Spouse may feel like securing a tail policy that extends coverage for third party claims against the Divesting Spouse is unnecessary because it provides a benefit solely for the Divesting Spouse.  In fact, a tail policy provides insurance protection that protects both the Recipient Spouse and the Divesting Spouse, and it is also a benefit to the company.  If third party claim is made against the Divesting Spouse after the divorce related to the business, the Divesting Spouse will likely demand that the company indemnify him or her.  If the D&O policy is still in place, however, the tail policy will enable the company tender a defense of the claim against the Divesting Spouse, because the D&O carrier will cover all of these legal defense costs.  Fortunately, a tail policy that extends D&O coverage is often not too expensive to secure.

7. Specify Treatment of Future Tax Filings

Dealing with all of the tax issues involved in the transfer of the business is an extensive subject that goes beyond the scope of this post, and spouses engaging in the transfer of a business interest are strongly advised to consult with a tax advisor during their divorce.  But there is one tax issue that the Recipient Spouse should consider addressing up front.  Many businesses held in marriages are structured as pass through entities (i.e., LLC’s partnerships, Sub S corporations), which means that the owners pay the taxes on all profits that are generated by the company.  As a result, in the year following the divorce, Recipient Spouse may be required to issue a K-1 to the Divesting Spouse based on the ownership interest held in the business by the Divesting Spouse during the year in which the divorce took place.

If the K-1 issued in the year after the divorce reflects any income that is apportioned to the Divesting Spouse, he or she may expect to receive a cash distribution from the company that is sufficient to cover the Divesting Spouse’s federal tax liability based on this income.  If the company does not issue any distribution to the Divesting Spouse, that would create what is known as “phantom income” because the Divesting Spouse has to pay taxes on this income even though no distribution was issued by the Company.  The issuance of phantom income to the Divesting Spouse is likely to provoke a heated dispute at that point.

The Recipient Spouse will therefore want to address in the divorce settlement how the future K-1 that will be issued to the Divesting Spouse will address any income generated by the business in the year of the divorce.  If the Recipient Spouse is prepared to issue a distribution to the Divesting Spouse, that will take care of the issue.  If the Recipient Spouse has no intention of authorizing the company to issue any distributions in the future to the Divesting Spouse, however, this issue will need to be dealt with by the Recipient Spouse in a manner that will not lead to a future legal dispute with the Divesting Spouse.

The transfer of ownership interests in business is common in divorce settlements.  But if business issues related to the transfer of this type of interest are not considered at the time of the divorce, the parties may find themselves engaging in continuing disputes they did not anticipate.  The Recipient Spouse, in particular, needs to take steps to ensure that the transfer takes place in a manner that allows the business to continue to run successfully, and to head off potential future conflicts with the Divesting Spouse and others after the divorce.

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transfer of llc interest to spouse

Transferring LLC Membership Interests Part 1—An Overview

A transfer of LLC membership interests can mean selling, donating, assigning, or gifting—basically one LLC member turning over his or her membership interests to another individual or entity. The transfer can be voluntary or involuntary.

  • Examples of voluntary transfers include selling membership interests to a third party or to the remaining members, donating membership interests to a charity, or leaving membership interests to a trust upon death.
  • Examples of involuntary transfers include those prompted by divorce, bankruptcy, and termination of employment.

The transferability of LLC membership interests is subject to competing interests.  On the one hand, freely transferable membership interests can be more attractive to members because they are easier to dispose of or cash out of—in other words, the membership interests are more liquid and marketable.

On the other hand, LLC members usually want to maintain the right to “pick their partners.” If membership interests are freely transferable, the remaining members have no control over who comes in as a business partner when a member decides to transfer membership interests. Restricted transferability places limits on transfers and the status of the recipient.

Are Membership Interests Freely Transferable or Restricted?

  The members decide. The good news about forming an LLC is how flexible the structure is. At the outset, the founding members can adopt transferability provisions— either in the operating agreement or in a separate buy-sell agreement.

  • If neither document addresses transferability, the default provisions of state law prevail.

In other words, if the founding members fail to address transferability in the operating agreement or in a buy-sell agreement, they’ve relinquished control and subjected the members and the LLC to the state law default provisions.

  • Although planning for a member’s departure from the LLC when you’re just forming it may be difficult, thinking through all the possible exit scenarios—and planning for them—is essential.

If your LLC is already up and running and you don’t have transferability provisions in place, the members can amend the operating agreement or adopt a buy-sell agreement. Look to the operating agreement for directions on how to amend the LLC’s terms.

How are Membership Interest Transfers Restricted?

  While membership interests are freely transferable in the sense that any member generally can transfer his or her economic rights in the LLC (subject to the operating agreement, a stand-alone buy-sell agreement, and state law), the management or voting rights in the LLC are usually what are restricted—otherwise, other members would be forced to become “partners” with someone not of their choosing.  Typically, a recipient of restricted membership interests can receive economic and management rights—a full membership interest—only with unanimous member consent.

In the next two articles in this series, we’ll look at voluntary and involuntary transfers of LLC interests.

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A Simple Succession Planning Tool For Single-Member LLCs

Jun 6, 2019 | Business & Corporate

BY MATTHEW J. LAPOINTE, ESQ. and ANTHONY D. BARTIROME, ESQ.

It is very common for a small business to be organized as a single-member limited liability company.  The LLC affords liability protection to the owner without the formalities required by a corporation, such as annual minutes of shareholder and director meetings.

The owner of a single-member LLC owns 100% of the membership interests of the LLC.  Membership interests of an LLC are a type of security, like stock in a corporation.  Sometimes, LLC membership interests are represented by physical certificates, like stock certificates, but most of the time LLC membership interests are un-certificated.

MATTHEW J. LAPOINTE, ESQ

MATTHEW J. LAPOINTE, ESQ

When the owner of a single-member LLC dies, his or her membership interest, like any other security, may be transferred by his or her will.  But relying on a will to transfer the LLC membership interest is not very efficient.  It may take several months to navigate the probate process and then distribute the LLC membership interest to the heirs.  Furthermore, the LLC’s business operations may be on hold during the probate proceeding, which is administered through the local court.

One way to avoid probate and to facilitate uninterrupted business operations is to utilize a “transfer on death” clause in the LLC operating agreement or on the LLC membership interest certificate.

The Florida Uniform Transfer-On-Death Security Registration Act (Florida Statutes Chapter 711) allows an individual to name a beneficiary of his or her LLC membership interest upon death in the same manner as an individual can name a “pay-on-death” beneficiary of a bank account.

For a single-member LLC, the operating agreement could state that the member’s LLC membership interest is to be transferred immediately upon death to a spouse, son or daughter, or other person.  If there is no operating agreement, the membership interest could be certificated and the certificate issued to “X, transfer on death to Y.”  The transfer-on-death beneficiary will own the business immediately upon death and will have the immediate right to control the affairs of the business.

In the case of a small owner-operated business, the ability to have a quick transition to a new owner can be of vital importance. Most of the value in an owner-operated business is in goodwill.  If the business cannot be transferred quickly this goodwill tends to dissipate and the longer it takes the less valuable the business becomes.  If the goal is to sell the business upon the death of the owner-operator, a transfer-on-death clause will greatly increase the chances of doing so for the best possible price.

ANTHONY D. BARTIROME, ESQ.

ANTHONY D. BARTIROME, ESQ.

The transfer-on-death clause would also be useful in a family business where a son or daughter works alongside a mother or father.  The business owner could name the child as the transfer-on-death beneficiary.  The parent would retain ownership and control of the business while alive and instantaneously upon the parent’s death ownership and control would vest in the child in a seamless transfer that avoids probate court.

The business attorneys and estate planning attorneys at Blalock Walters often collaborate to find the most efficient means of transferring business assets in the event of the business owner’s death.  If you have questions about succession planning for your business, please call Matt Lapointe or Tony Bartirome at 941. 748.0100.

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Quick Summary

What is an llc co-owned by spouses, requirements of a qualified joint venture llc, advantages of husband and wife qualified joint venture llc, 6 steps to form an llc with your spouse, 1. confirm that the name you want to use is available, 2. identify your registered agent, 3. file the articles of organization, 4. draft an llc operating agreement, 5. apply for an ein, 6. obtain business licenses and permits, other things to consider, understand tax implications, estate planning benefits of co-owning an llc as spouses, inheritance planning, asset protection, tax efficiency, business continuity, alternative options, 1. sole proprietor, 2. hire your spouse as an employee, 3. form a partnership, llcs co-owned by spouses (guide to a husband & wife llc).

Jon Morgan

Is creating an LLC as a married couple, and adding a professional element to your personal relationship, the best business decision to pursue? Will the union benefit from the ownership structure, management, liability protection, and tax options?

As a business consultant specializing in limited liability companies, I have over a decade of practice addressing clients’ concerns regarding LLC formation and operations.

I’ll provide you with a comprehensive guide on establishing an LLC co-owned by spouses to help you determine if it is the right arrangement – personally and professionally.

  • LLCs co-owned by spouses is classified as a Qualified Joint Venture company that simplifies the organizational and operational structure, allowing married couples to be recognized as a single entity for tax purposes.
  • To qualify, the LLC must be created in a community property state, be solely owned by the married couple, both spouses must actively manage the firm, they must file a joint federal income tax return, and the LLC shouldn't opt to be taxed as a corporation.
  • An LLC co-owned by spouses, where each holds at least 50% interest, is treated as a disregarded entity for tax purposes.
  • In my opinion, co-owning an LLC as spouses not only streamlines tax processes but also strengthens asset protection, ensuring both partners have a clear stake and say in the business's operations.

A man and a woman looking having co owned LLC

An LLC co-owned by spouses, also referred to as Qualified Joint Venture LLC, is a special federal tax classification.

It is a disregarded entity in which the husband and wife are the only limited liability company members and each spouse has an ownership interest of at least 50%.

Since the married couple is recognized as a single entity, the business is not taxed as a partnership or multi-member LLC.

A QJV allows a husband-wife-owned business to file a single business tax instead of individual returns, making the process simpler and faster.

For federal tax purposes, the husband and wife are considered a single "unit" in community property states and will also be a disregarded entity.

If you can show that you are legally married and satisfy the above criteria, you can have your entity classified as a Single Member LLC.

"By default, multi-member LLCs are taxed as a Partnership with the IRS, however, the IRS allows for husband and wife LLCs to be treated as “one unit”." - Matt Horwitz, Leading Authority in LLC Education

If a married couple creates a limited liability company in a "common law property" state, they are not eligible for the Qualified Joint Ventures.

If a married couple forms an LLC in a community property state, they can qualify for the Qualified Joint Venture option if they satisfy the following requirements:

  • The LLC is established/created in a community property state.
  • The married pair are the only LLC owners (there are no other people or firms that own the LLC).
  • Both spouses actively contribute to and manage the firm.
  • The married pair files a joint federal income tax return.
  • The LLC has not chosen to be taxed as a corporation.

There are federal tax purposes for married couples to operate as a qualified joint venture LLC. This is a designation that allows the two spouses to file a joint tax return but still maintain their separate legal identities.

Community property states will recognize the LLC as community property as well, meaning income and expenses from the business will be divided equally between husband and wife on their individual state tax returns.

An office man and office woman sitting at a couch

The main advantages of a husband and wife Qualified Joint Venture LLC are:

  • Save time : A married couple eliminates the extra paperwork and record-keeping hassles that come with being in a Partnership.
  • Save money : You can save money from filing fees since there are fewer tax returns to be submitted.
  • Social Security and Medicare : Since these LLC taxes are calculated on an accumulated basis, the married couple may get more credit for paying Social Security and Medicare payments (without having to pay extra taxes).

A man and a woman talking in an office

To form an LLC with your spouse, you'll need to follow these six simple steps:

To establish an LLC, you must choose a name for your LLC that is not currently used by another firm in your state. The Secretary of State's website provides a database containing all registered entities in the state.

Choose your registered agent – a person or firm that is authorized to conduct business in your state. The LLC registered agent is the individual or company who will accept legal notifications such as service of process and tax forms on behalf of your LLC.

In some states, you have the option of choosing yourself; however, it's generally better to go with a professional service.

The LLC Articles of Organization , also referred to as a Certificate of Organization, is a document that officially establishes your LLC. It will include basic information about your company such as its name, registered agent, and purpose.

File your LLC paperwork with the Secretary of State's office [ 1 ]. According to the U.S. Small Business Administration, over 80% of small businesses opt for LLC formation due to its flexibility and protection benefits, emphasizing the popularity of this structure among entrepreneurs.

This document will outline the rules and regulations that govern your LLC.

The operating agreement should include:

  • Management structure.
  • The names and addresses of the members.
  • Profits and liability distribution.
  • Decision-making.
  • The date on which your LLC was established.
  • The name and address of the Registered Office and Registered Agent must be provided.
  • The LLC's primary commercial goal.
  • The percentage that a member's capital is owned by the group.

An Employer Identification Number (EIN) is a nine-digit number that is assigned to businesses by the Internal Revenue Service (IRS). It's used to track business income and expenses for federal tax purposes. You'll need an EIN even if you're the only member of your LLC.

You can apply for an EIN online or by mail. Be prepared to provide some basic information about your company, such as its name and address.

Depending on the type of business you operate and the state in which you reside, you may need to obtain various business licenses and permits.

Check with your local chamber of commerce or licensing bureau for more information, especially in community property states.

A man and a woman arguing with someone

After forming your single-member LLC, there are other things you need to consider. For example, you'll need to:

  • Decide who will manage the company.
  • Develop a system for tracking income and expenses.
  • Choose a banking institution and open an LLC business bank account .
  • Purchase liability insurance.

LLCs are classified as pass-through entities for federal tax purposes, meaning the company's income and losses are passed through to individual members who report this information on their personal tax returns, including self-employment tax.

The IRS recognizes the LLC as a disregarded entity for federal tax purposes, meaning it isn't taxed the same as a multi-member LLC .

In community property states, LLCs follow community property laws, which treat the income and assets as equally belonging to both spouses. If only one spouse is an LLC member, they are considered the sole owner for federal tax purposes.

It is recommended to seek guidance from an attorney or accountant familiar with the intricacies of LLCs to navigate the legal and tax implications effectively. It's especially true when you're in community property states.

Estate planning is a critical aspect of securing your financial legacy and ensuring the smooth transfer of assets to your heirs and beneficiaries.

Co-owning an LLC as spouses can be a strategic and integral part of a comprehensive estate planning strategy. This arrangement offers several distinct advantages:

Co-owning an LLC with your spouse provides a structured and legally recognized framework for managing assets and business interests. In the event of the passing of one spouse, the ownership structure ensures a clear path for the surviving spouse to inherit the deceased spouse's share of the business.

An LLC offers a layer of protection for the personal assets of its members. When spouses co-own an LLC, their personal assets are typically shielded from business liabilities. In the event of legal claims or financial difficulties faced by the LLC, the couple's personal assets, such as their home or savings, are generally safeguarded.

Estate taxes can significantly impact the transfer of wealth between spouses and heirs. Co-owning an LLC can provide tax advantages, especially in terms of gift and estate tax planning. The structure allows for the strategic allocation of ownership interests, which can minimize tax liabilities and maximize the assets passed on to heirs.

For couples who run a business together, co-owning an LLC ensures that the business can continue operating smoothly in the event of one spouse's passing. The surviving spouse can seamlessly assume control of the business without disruption, preserving its value and the livelihoods it supports.

A man and woman discussing alternative options

If you're not interested in setting up a Joint Venture LLC, you may want to consider other options, even in community property states.

A sole proprietorship is the simplest type of business structure and doesn't require any paperwork or filing with the state. However, as a sole proprietor, you are personally liable for any debts or liabilities incurred by your business.

Kristin Grant, managing attorney at Grant Attorneys at Law , pointed out that a sole proprietorship is an unincorporated business, so there aren’t many legal formalities or upkeep needs.

However, unlike with an incorporated firm, a sole proprietorship’s owner does not have limited liability protection – which can put his or her personal assets in danger.

Another option is to hire your spouse as an employee. This will give your spouse some protection from personal liability. However, you will need to pay payroll taxes and file employment tax returns.

If you want to share the responsibilities of running your business with your spouse, you may want to consider forming a partnership.

This is a more complex structure than a sole proprietorship or LLC and requires the filing of a partnership agreement with the state. In a partnership, each spouse is considered to be an equal owner.

Related Articles:

  • Should You Start an LLC for Day Trading
  • Should I Fire My Business Partner

Should My Spouse Be a Member of My LLC?

Your spouse should be a member of your LLC If you're operating your business entity in a community property state.

Is a Husband and Wife Considered a Single-Member LLC?

A husband and wife spouse is considered to be a single-member LLC in states that implement community property law, as such the business may be taxed as a disregarded entity. It applies even when both spouses materially participate in the company.

References:

  • https://www.sba.gov/business-guide/launch-your-business/register-your-business

About The Author

Jon Morgan

Jon Morgan is the CEO and Editor-in-Chief of Venture Smarter, a leading consulting firm that specializes in helping startups and small businesses scale and grow.

With over 10 years of experience in the industry – working with both early-stage startups and large corporations – Jon has a wealth of knowledge and expertise in areas such as strategic planning and management, market research, finance, sustainability, technology, entrepreneurship, and financial analysis.

Born and bred in California where he got his degree in business management at University of California, Davis, Jon also earned a Master's degree in Business Administration (MBA) from Harvard Business School in 2010.

In addition to his consulting work, Jon is also a sought-after speaker and author, sharing his insights on business growth and success with audiences around the world.

A father of two and a loving husband, Jon is also a certified fur dad to their poodle Sophie. In his downtime, he is committed to mastering Spanish as a second language.

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Tax issues to consider when a partnership interest is transferred.

By Colleen McHugh - Co‑Partner‑in‑Charge, Alternative Investments

Tax Issues to Consider When a Partnership Interest is Transferred

There can be several tax consequences as a result of a transfer of a partnership interest during the year. This article discusses some of those tax issues applicable to the partnership.

Adjustments to the Basis of Partnership Property Upon a transfer of a partnership interest, the partnership may elect to, or be required to, increase/decrease the basis of its assets. The basis adjustments will be for the benefit/detriment of the transferee partner only.

  • If the partnership has a special election in place, known as an IRS Section 754 election, or will make one in the year of the transfer, the partnership will adjust the basis of its assets as a result of the transfer. IRS Section 754 allows a partnership to make an election to “step-up” the basis of the assets within a partnership when one of two events occurs: distribution of partnership property or transfer of an interest by a partner.
  • The partnership will be required to adjust the basis of its assets when an interest in the partnership is transferred if the total adjusted basis of the partnership’s assets is greater than the total fair market value of the partnership’s assets by more than $250,000 at the time of the transfer.

Ordinary Income Recognized by the Transferor on the Sale of a Partnership Interest Typically, when a partnership interest is sold, the transferor (seller) will recognize capital gain/loss. However, a portion of the gain/loss could be treated as ordinary income to the extent the transferor partner exchanges all or a part of his interest in the partnership attributable to unrealized receivables or inventory items. (This is known as “Section 751(a) Property” or “hot” assets).

  • Unrealized receivables – includes, to the extent not previously included in income, any rights (contractual or otherwise) to payment for (i) goods delivered, or to be delivered, to the extent the proceeds would be treated as amounts received from the sale or exchange of property other than a capital asset, or (ii) services rendered, or to be rendered.
  • Property held primarily for sale to customers in the ordinary course of a trade or business.
  • Any other property of the partnership which would be considered property other than a capital asset and other than property used in a trade or business.
  • Any other property held by the partnership which, if held by the selling partner, would be considered of the type described above.

Example – Partner A sells his partnership interest to D and recognizes gain of $500,000 on the sale. The partnership holds some inventory property. If the partnership sold this inventory, Partner A would be allocated $100,000 of that gain. As a result, Partner A will recognize $100,000 of ordinary income and $400,000 of capital gain.

The partnership needs to provide the transferor with sufficient information in order to determine the amount of ordinary income/loss on the sale, if any.

Termination/Technical Termination of the Partnership A transfer of a partnership interest could result in an actual or technical termination of the partnership.

  • The partnership will terminate on the date of transfer if there is one tax owner left after the transfer.
  • The partnership will have a technical termination for tax purposes if within a 12-month period there is a sale or exchange of 50% or more of the total interest in the partnership’s capital and profits.

Example – D transfers its 55% interest to E. The transfer will result in the partnership having a technical termination because 50% or more of the total interest in the partnership was transferred. The partnership will terminate on the date of transfer and a “new” partnership will begin on the day after the transfer.

Allocation of Partnership Income to Transferor/Transferee Partners When a partnership interest is transferred during the year, there are two methods available to allocate the partnership income to the transferor/transferee partners: the interim closing method and the proration method.

  • Interim closing method – Under this method, the partnership closes its books with respect to the transferor partner. Generally, the partnership calculates the taxable income from the beginning of the year to the date of transfer and determines the transferor’s share of that income. Similarly, the partnership calculates the taxable income from the date after the transfer to the end of the taxable year and determines the transferee’s share of that income. (Note that certain items must be prorated.)

Example – Partner A transfers his 10% interest to H on June 30. The partnership’s taxable income for the year is $150,000. Under the interim closing method, the partnership calculates the taxable income from 1/1 – 6/30 to be $100,000 and from 7/1-12/31 to be $50,000. Partner A will be allocated $10,000 [$100,000*10%] and Partner H will be allocated $5,000 [$50,000*10%].

  • Proration method – this method is allowed if agreed to by the partners (typically discussed in the partnership agreement). Under this method, the partnership allocates to the transferor his prorata share of the amount of partnership items that would be included in his taxable income had he been a partner for the entire year. The proration may be based on the portion of the taxable year that has elapsed prior to the transfer or may be determined under any other reasonable method.

Example – Partner A transfers his 10% interest to H on June 30. The partnership’s taxable income for the year is $150,000. Under the proration method, the income is treated as earned $74,384 from 1/1 – 6/30 [181 days/365 days*$150,000] and $75,616 from 7/1-12/31 [184 days/365 days*$150,000]. Partner A will be allocated $7,438 [$74,384*10%] and Partner H will be allocated $7,562 [$75,616*10%]. Note that this is one way to allocate the income. The partnership may use any reasonable method.

Change in Tax Year of the Partnership The transfer could result in a mandatory change in the partnership’s tax year. A partnership’s tax year is determined by reference to its partners. A partnership may not have a taxable year other than:

  • The majority interest taxable year – this is the taxable year which, on each testing day, constituted the taxable year of one or more partners having an aggregate interest in partnership profits and capital of more than 50%.

Example – Partner A, an individual, transfers his 55% partnership interest to Corporation D, a C corporation with a year-end of June 30. Prior to the transfer, the partnership had a calendar year-end. As a result of the transfer, the partnership will be required to change its tax year to June 30 because Corporation D now owns the majority interest.

  • If there is no majority interest taxable year or principal partners, (a partner having a 5% or more in the partnership profits or capital) then the partnership adopts the year which results in the least aggregate deferral.

Change in Partnership’s Accounting Method A transfer of a partnership interest may require the partnership to change its method of accounting. Generally, a partnership may not use the cash method of accounting if it has a C corporation as a partner. Therefore, a transfer of a partnership interest to a C corporation could result in the partnership being required to change from the cash method to the accrual method.

As described in this article, a transfer of a partnership interest involves an analysis of several tax consequences. An analysis should always be done to ensure that any tax issues are dealt with timely.

If you or your business are involved in a transfer described above, please contact your Marcum Tax Professional for guidance on tax treatment.

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Transferring Company Ownership Interests in Divorce Settlements - A Transaction in Which Both Spouses Need to Exercise Significant Caution

Winstead PC

It is common for divorce settlements to include a transfer between spouses of an ownership interest in a private company, but the frequency of this transaction does not mean that it should be taken lightly. In fact, transferring a private company ownership stake in a divorce settlement often includes heightened business risks beyond the sale of a business interest between two unaffiliated parties.  This post therefore focuses on critical business risks present for both the spouse acquiring the ownership interest and the spouse who is transferring the interest in the company.  These business risks should be discussed with the spouses’ family law or business counsel to ensure that they are addressed in the parties’ divorce settlement.

Business Risks to Spouse Who Acquires Company Interest in Divorce

The following are three of the most critical points the spouse acquiring the private company ownership interest will want to include in the divorce settlement and related contracts that confirm the transfer of this interest, and they are discussed below:

  • Confirming Inspection Was Completed
  • Including a Broad Anti-Fraud Provision
  • Documenting Full, Complete Transfer of Interest
  • All Inspections of Relevant Materials Completed

The acquiring spouse (“Transferee”) wants to avoid all future claims by the spouse who is transferring his/her ownership interest in the business (the “Transferor”) as part of the divorce settlement.  Therefore, the Transferee will want to secure representations from the Transferor in the settlement documents confirming that he/she had both access to and time to review all financial records and business documents related to the company at issue in the transaction before following through with the Transferor’s transfer of the ownership interest.  These representations should help to cut off future claims by the Transferor that he or she was deprived in any way of the information necessary to make a fully informed decision about the consideration that the Transferor received before transferring his/her interest in the company to the Transferee spouse.

Inclusion of Broad Anti-Fraud Provision

In Texas, spouses owe each other a fiduciary duty during their marriage when they engage in business dealings together.  That fiduciary duty is extinguished, however, once either spouse files a divorce proceeding, but the Transferee spouse should nevertheless insist on securing broad representations from the Transferor spouse that, in entering into the divorce settlement, he/she is not relying on any promises, representations or consideration by the Transferee spouse that are not fully set forth in the settlement agreement.

This type of term in the Settlement Agreement is commonly known as an “anti-fraud” provision, because its purpose is to cut off any later fraud claim by the Transferor spouse after transferring his/her interest in the company based on the notion that the Transferor was misled in some manner by the Transferee, which induced the Transferor to enter into the transaction.  Therefore, this anti-fraud provision confirms that the Transferor has agreed to receive only that specific consideration that is documented and expressly set forth in the terms of the divorce settlement agreement.

Documentation of Transfer of Full Ownership Interest

The final issue of concern to the Transferee spouse is to ensure that the entire interest of the Transferor spouse is obtained in the transaction.  The Transferee will want to confirm that all right, title and interest in the company held by the Transferor is transferred in the transaction and also confirm that the Transferor does not retain any interest whatsoever in the company, or any of its assets.  In many divorce settlements the Transferee spouse does not have funds at the time of the divorce that are sufficient to pay for the full value of the 50% interest held by the Transferor spouse in the company, and the settlement payment must therefore be made in a structured buyout.  Even in the case of a structured buyout, however, the Transferee will want to insist that the full equity in the company held by the Transferor transfers at the time of the divorce.  This transfer of the equity is necessary at the time of the divorce to ensure that the Transferee does not become subject to any future claims by the Transferor related to the operation or performance of the business after the divorce has become final.

If the Transferee lacks the funds to pay for the full value of the Transferor’s interest at the time of the divorce, however, the Transferor may insist on securing some form of collateral during the buyout period to ensure that full payment is made.  The collateral could include a secured interest in the stock or membership interest that is being transferred.  If the stock or membership interest is used as collateral, a default in payment by the Transferee would permit the Transferor to initiate a judicial foreclosure to recover the stock or membership interest that was transferred to the Transferee.

Business Risks to Spouse Who Transfers Company Interest in Divorce

The spouse who transfers his or her ownership interest in the company to the other spouse also has several key business points this Transferor will want to include in the divorce settlement, and three of these important business terms are listed and then discussed below:

  • Securing Representation of No Imminent Sale of Company
  • Including Broad Release Provision from the Company Itself
  • Obtaining Indemnity From Company Against Future Claims
  • Representation that No Sale of Business is Imminent

The Transferor does not want to be paid for his/her interest in the business only to find out that if the Transferor had waited a matter of weeks or months, the company would have been sold for a much higher value than the seller/transferor received for his or her interest at the time it was purchased by the company.  The way to avoid this is to secure an agreement that if the business is sold within some set period of time after the divorce, perhaps one year, the Transferor will receive an additional payment equal to the additional amount that the Transferor would have received if he/she remained an owner at the time of the sale.  This contract term is called a look back provision and is common in purchase/sale agreements.

If the Transferee will not agree to include a look back provision in the divorce settlement, the Transferor may insist on securing a representation that no sale of the company is imminent or will take place within a specified period of time after the transfer is made.  This term gives the Transferor protection of a similar nature to the look back provision.

Transferor Spouse Should Receive a Release from the Business

Most divorce settlements include a mutual release of claims in which each spouse releases all claims against the other spouse before the date of the settlement.  When a business interest is involved, however, the Transferor spouse should also require the business to provide that spouse with a release of all claims by the business.   This will preclude the Transferee spouse from filing any claims by or on behalf of the business against the Transferor after the stock in the business has been transferred and the Transferee now has full control over the company.  In sum, the Transferor needs to secure a full and broad release from the company, as well as a similar broad release from the Transferee, as an essential part of the divorce settlement.

Transferor Spouse Should Also Receive Indemnity From the Business

For all of the same reasons that the Transferor should demand a release from the company, the Transferor should also insist on being indemnified by the company if the Transferor is named as a defendant in any later lawsuit filed after the divorce settlement is completed.  After the transfer takes place, the Transferee is now likely the full or certainly the majority owner of the business, and the owner should be required to provide the Transferor with an indemnity against all claims by third parties unless the claim itself is the direct result of some bad faith action or willful misconduct by the Transferor.   Including an indemnity provision in the divorce settlement provides the Transferor with a reasonable measure of protection in the event that the Transferor is named in any lawsuit related to the company at issue.

In our entrepreneurial society, spouses frequently have ownership stakes in businesses that they acquired during the marriage, and which will then need to be addressed when a divorce is filed.  While transfers of ownership interests are quite common in divorce proceedings, these transfers must be handled with a significant amount of care and precision.  If the divorce settlement fails to address the likely and probable scenarios involved in the transfer of a business interest from one spouse to another, the divorce decree will not signify then end of all disputes between the parties.  Instead, the parties may find themselves embroiled in another lawsuit over business issues that is at least as contentious as their divorce proceeding.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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How to Transfer LLC Membership Interest

To understand how to transfer LLC membership interest, individuals must read the requirements provided in the limited liability company's operating agreement. 3 min read updated on February 01, 2023

Transferring LLC Membership Interest

An owner, also known as a member, of an LLC owns a part of the business. This ownership is also called interest. An owner may choose to transfer his or her interest to another individual for reasons such as:

  • Leaving the business.
  • Financial purposes.
  • Personal reasons.

Usually, the LLC's operating agreement contains the requirements that oversee the transferring of an owner's interest.

The following are steps to take when determining how to transfer membership interest:

  • Look over the LLC's operating agreement .
  • If the operating agreement doesn't cover transferring interest, then read the applicable state laws regarding LLCs .
  • Determine the worth of the membership interest.
  • Complete the required tasks and paperwork.
  • Acquire a transfer document.
  • Sign and date the document.

When looking through the LLC's operating agreement, search for the section that discusses the qualifying reasons for transferring one's interest along with how to do so. It should also list any specific requirements or restrictions that pertain to the LLC as well as a method for calculating the worth of the owner's interest.

If the operating agreement does not discuss the details of transferring membership interest, then the state's LLC law should provide insight into what to do. If the operating agreement doesn't provide a method for calculating the value of the interest , then the owner must discuss with the other members of the LLC to determine its worth. The owner should have the LLC's financial documents and the documentation of his or her distributions on hand when meeting with other members.

Required tasks and paperwork for transferring membership interest should be listed in the operating agreement. For instance, the agreement might state that all members of the LLC must approve the transfer in writing prior to transferring.

To acquire a transfer document, the owner should first determine if the LLC has a standard form. If it does not, then (s)he might have to draft a form. He should verify that the requirements provided in the operating agreement or by state law are met. These requirements usually include the following:

  • The owner's name
  • The name of the LLC
  • The recipient's name
  • The percentage of interest being transferred

If all of the interest is being transferred, that must be stated in the transfer document.

After the owner signs and dates the document, he should make multiple copies for his records, the LLC, and the new owner. Usually, the document is given to the recipient; however, the owner should verify whether or not the LLC should be given the original.

State Laws Governing the Transfer of Membership Interest

Every state provides standard rules that oversee an LLC in the event that its owners did not provide rules in the operating agreement; however, these rules can vary from state to state.

For example, Section 608.432 of the Florida Statutes states that a member of an LLC cannot transfer interest unless permitted in the operating agreement, or a majority of the non-assigning owners agrees to the transfer. In contrast, Article VI Section 603 of the New York Statutes declares that unless the LLC's operating agreement prohibits the transfer of interest, an owner can transfer interest either in whole or in part. These two states take opposite approaches to the transferring of membership interest. Both approaches are common, so the steps one takes when transferring membership interest will depend on the state that governs the LLC.

Investing in Membership Interests Versus Real Estate

When purchasing real estate in Wisconsin, a buyer must pay a transfer fee to the state of .3 percent of the buying price. Furthermore, the purchase price is considered when determining the value of the property, which usually results in increased property taxes.

To avoid these extra costs, individuals can buy the membership interests of the LLC that owns the real estate being purchased. This gives the individual control of the real estate without changing the actual ownership.

If you need help transferring LLC membership interest, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Content Approved by UpCounsel

  • LLC Purchase Agreement
  • Transfer of Membership Interest in LLC: Everything to Know
  • Sale of Membership Interest in LLC Form
  • LLC Membership Interest
  • LLC Membership Interest Transfer Agreement
  • Interest Purchase Agreement: Everything: You Need to Know
  • Selling an LLC Business
  • LLC Transfer Of Ownership Form
  • How to Change LLC Ownership
  • Can You Sell an LLC

How to Transfer an LLC Membership Interest

So you’ve formed an LLC with one other person and out of the blue, the other member says he wants out. Or perhaps your own situation has changed and you want to transfer your membership interest in the LLC to the other member. How do you do transfer the interest from one member of the LLC to another?

If there are only two members before the transfer and only one will remain, the process of one member giving up his interest is pretty simple. Although it could take several forms, the effect is that the member giving up his interest in the LLC is essentially transferring all of his rights to the remaining member. However, the mechanics of the transfer may differ under state law, as may the consequences.

Abandoning the LLC Membership Interest

One way to do get rid of an unwanted LLC interest is to simply abandon it, if that action is permitted under the applicable state law and the operating agreement of the LLC. Generally, in order to establish that the interest has been abandoned, the LLC member giving up the interest must take some affirmative step. Typically that take the form of a notice to the LLC and the other member that the membership interest is being abandoned.

The easy thing about abandonment is that it does not require the consent of the remaining member. The member giving up his LLC interest basically just walks away. Of course, abandoning the LLC interest does not relieve the departing member of any liabilities he may have personally incurred to third parties before his abandonment. FOr example, if he signed a personal guaranty of LLC debt, his merely giving up his interest in the LLC will not automatically negate his contractual obligation to the lender.

Assigning the LLC Membership Interest

Where the two members are in mutual agreement on the terms of the withdrawing member’s departure, a better alternative is to have the departing member assign his membership interest to the remaining member. Even if the departing member is not being paid for his interest in the LLC, there are several advantages to making an assignment of the LLC interest.

First, in many cases either state law or the LLC’s operating agreement may restrict the ability of a member to unilaterally withdraw. In that case, the attempted abandonment might either be ineffective or at least lead to a dispute and possible litigation. An assignment eliminates that potential problem.

Second, an assignment of an LLC interest is typically done in a written document signed by the parties that can often cover related issues by agreement. For example, an assignment agreement where compensation is being paid will usually contain a representation by the assigning member that the the membership interest is not encumbered by a lien or similar restriction.

Tax Issues Related to Transferring an LLC Membership Interest

A transfer of an LLC interest where compensation is being paid is treated as a sale or exchange. The selling member will usually have a taxable gain or loss on the sale.

Even where the two members agree that the departing member is getting nothing for his interest, if the LLC has liabilities if the transaction results in a decrease in the departing member’s share of liabilities under the Internal Revenue Code, he or she will be deemed to have received a cash distribution, and the relinquishment of his or her interest is considered a sale or exchange. Walking away from a partnership in this manner will result in a capital loss. Courts have ruled that even a de minimus amount determined in any way to be compensation for the partnership interest will cast the transaction as a sale.

Strategy Law LLP

Beware – Your Gift of LLC Interests to a Family Member May Be Disallowed

May 23, 2016

Beware – Your Gift of LLC Interests to a Family Member May Be Disallowed

By: Tamara Pow

Your gift or sale of an LLC interest to a family member may be disallowed for tax purposes.

If you are gifting or selling a limited liability company (“LLC”) interest to a family member, you must keep in mind the requirements of Internal Revenue Code Section 704(e). IRC (section sign) 704(e) provides that a gift or sale to a spouse, ancestor or lineal descent (or trust for their benefit) must meet certain requirements. If not, the donee will not be considered a member of the LLC for tax purposes, the gift will not be a completed gift for estate planning purposes, and the donee’s distributive share of LLC items will be subject to reallocation.

Your LLC interest gift must satisfy five conditions to qualify the donee as a member for tax purposes:

  • Capital must be a material income producing factor for the LLC. In other words, the LLC’s income must be based on a business that requires substantial capital, such as inventories or equipment, and not a pure service based business resulting in commissions or fees.
  • The donee must own a capital interest. You can’t simply gift an interest in profits. If the LLC were to distribute its assets, the LLC operating agreement must provide for the donee to receive a share of the assets on dissolution or if the donee withdraws from the LLC.
  • If the donor provides services to the LLC, she must be reasonably compensated.
  • The donor and donee’s share of LLC income should be relative to each of their capital interests in the LLC.
  • The transfer (whether by gift or sale) must not be a sham. This is a facts and circumstances test that is based on several factors.

The factors that the IRS considers when determining whether or not the transfer is a sham center around whether or not the donee actually got control over the LLC membership interest. The treasury regulations tell us that the donor has too much control if she retained a unilateral right to withhold LLC distributions (other than for reasonable needs of the LLC business), she retained control over the essential assets of the building (e.g. by leasing them to the LLC), she retains more-than-usual management powers, there is a limitation on the donee’s right to sell or liquidate, or the donee is a minor. On the other hand, the donee has enough control if he has substantial participation in the management of the business of the LLC, he receives distributions of all or most of his distributive share of LLC income for his sole use and benefit, and he is really treated as a member for things like bank account control, filing tax returns, and in the LLC operating agreement.

Making a gift of an LLC interest is a transaction that involves expertise in both estate planning and LLC membership interests. To prevent unintended and potentially expensive estate consequences due to incomplete gifts, make sure your LLC attorney is coordinating with your estate planning attorney to ensure compliance with IRC Section 704(e).

Tamara B. Pow is a founding partner of Strategy Law, LLP in downtown San Jose, California where she practices business and real estate law including formations, operations, transfers, conversions and dissolutions of both family LLCs and non-family LLCs. Her tax background, including time as a tax consultant at Price Waterhouse, LLP, as well as her MBA and real estate brokers license help her in advising owners of limited liability companies and other business entities.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

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  • PERSONAL FINANCIAL PLANNING

Tax Considerations for Divorcing Spouses

  • Personal Financial Planning
  • Estate Planning

Marital planning is the bedrock of estate and income tax planning for individual taxpayers, but even a well-conceived plan suffers when the married couple decide to divorce. During the divorce proceedings, it is critical for each taxpayer to work with a tax adviser to understand the estate, gift, and income tax consequences of the marriage dissolution. Several provisions of the Internal Revenue Code apply commonsense rules to dividing asset ownership and implement the general rule that divorce should not be a taxable event. Other Code sections, however, can create unexpected difficulties for divorcing spouses. This item outlines considerations for managing and correctly timing a marital property settlement from a tax perspective.

The first key provision is Sec. 2516, a gift tax rule that renders nontaxable certain payments and transfers between former spouses that would otherwise be taxable. However, Sec. 2516 applies only to payments and transfers made pursuant to a written agreement that resolves the divorcing spouses' marital and property rights or provides for the support of minor children. In addition, the final decree of divorce must occur no later than two years after execution of the written agreement and no earlier than one year prior to the execution of the agreement. While the actual payments do not have to be made during the three-year period, they must be traceable to the agreement. Sec. 2516 provides that the transfers will be deemed to be made for full and adequate consideration, which negates the gift.

Sec. 2516 covers both direct transfers and transfers in trust but only to the extent of the value of the former spouse's marital and property rights and a reasonable allowance for the support of minor children. Taxpayers who have tried to argue that payments or discretionary distributions to adult children should fit within Sec. 2516 have been unsuccessful, as exemplified by Technical Advice Memorandum 200011008, in which the IRS ruled that life insurance proceeds paid to adult children were not protected by Sec. 2516.

Another gift tax rule that divorcing spouses must navigate is Sec. 2513, which governs the gift-splitting election. Because this statute mandates that the donor spouse and the nondonor spouse signify their consent to the gift-splitting election and that the spouses be married at the time of the gift (and neither may remarry during the calendar year), it is essential for divorcing spouses to incorporate the timing of the divorce into their gift planning.

So that the signed consent does not become a point of contention, it is optimal to have the nondonor spouse agree in the property settlement agreement to sign the Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return , when finalized, consenting to the gift-splitting election. The consenting spouse is not required to file a separate gift tax return, but it is important that each spouse understand that with gift splitting, the entire gift tax liability is joint and several, and all gifts eligible for gift splitting in a calendar year are subject to the gift-splitting election.

Many estate plans are drafted with "kick-out" provisions, which are triggered upon divorce, once spouses are no longer cohabiting, or upon the filing of a petition for legal separation or dissolution of the marriage. The typical kick-out provision provides that the former spouse and all of his or her family members (except the divorcing couple's descendants) are deemed to have died intestate on the date of the triggering event. As such, these persons are incapable of serving as trustees or trust protectors and are also removed as beneficiaries. These provisions are common in wills and irrevocable trusts, including spousal limited access trusts (SLATs), grantor retained annuity trusts (GRATs), and intentionally defective grantor trusts (IDGTs).

Many advisers recommend these provisions to avoid forced grantor trust status. Under Sec. 672(e)(1)(A), a grantor is treated as holding any power or interest held by "any individual who was the spouse of the grantor at the time of the creation of such power or interest." If a former spouse remains a beneficiary or trustee, the grantor loses the flexibility to turn off grantor trust status. It is essential to plan for the termination of grantor trust status, especially if the trust has outstanding liabilities.

Sec. 682 is intended to override the grantor trust rules and causes trust income that is distributed to a former spouse to be included in his or her gross income. Income distributed for the support of minor children remains taxable to the grantor. The open question here is what definition of income applies for purposes of Sec. 682, as income is not defined in the Sec. 682 regulations. Since Sec. 682 is intended to override the grantor trust rules, most advisers believe that the Sec. 671 definition applies in a way that income is not limited to fiduciary accounting income but rather should be interpreted as taxable income. Given this uncertainty, it is recommended that a written settlement agreement governing distributions to a former spouse from a grantor trust that falls within Sec. 682 include a tax reimbursement provision so that the former spouses agree that if the IRS were to take a contrary interpretation on the definition of income, the aggrieved party could be reimbursed.

Sec. 1041 is the income tax counterpart to Sec. 2516 and furthers the legislative goal of preventing recognition of income, gain, or loss on transfers of property between spouses incident to a divorce. This nonrecognition treatment under Sec. 1041 and Temp. Regs. Sec. 1.1041-1T can (or must, in many cases) survive the divorce itself and applies to transfers between former spouses if the transaction occurs (1) not more than one year after the marriage ceases, or (2) not more than six years after the marriage ceases and is made pursuant to a divorce or separation instrument or a modification or amendment to such an instrument. Although the property transfers themselves do not trigger taxable income, advisers should still study the impact of the ultimate disposal of those assets. Thus, when dividing marital assets, spouses must look beyond fair market value (FMV). Consider the assets in the exhibit below, assuming for simplicity a 40% ordinary income tax rate and a 20% long-term capital gain tax rate.

Exhibit: Tax effect of disposals of different types of assets

However, this type of analysis may oversimplify the matter. It is likely that $100 in a Roth IRA is worth more than $100 in cash, due to the possibility of future tax-free growth. In addition, limits on recognition of capital losses may limit their utilization and, thus, their value. Divorcing spouses may also wish to cooperatively plan to minimize their overall future tax impact, as certain assets may be more valuable in one individual's hands than in the other's, depending on the individuals' tax attributes, life expectancies, effective tax rates, or ability to use losses. Tax sharing agreements may be included as part of the divorce decree and aid in truing up the economic effects when assets cannot be otherwise easily divided, but these agreements can be complex and difficult to manage.

Special care must be taken in structuring the property transfer, as Sec. 1041 generally covers only transfers between spouses or transfers to a third party on a spouse's behalf (such as the payment of attorneys' fees). Structuring considerations may be as simple as the choice between splitting shares of publicly traded stock (which would not trigger gain) or selling the stock and splitting or transferring cash (which would trigger gain). However, these types of analyses become more complex in closely held businesses or other situations where divorcing spouses hold assets inside partnerships or other legal entities.

Example 1: A and B are divorcing spouses. They intend to divide their marital assets pursuant to a divorce decree and expect that all assets will be transferred and divided within six months of the dissolution of the marriage. A owns a 50% interest in XYZ LLC, which is taxed as a partnership. The FMV of her interest is $200,000, and her tax basis in the asset is $100,000.

If XYZ were to redeem a portion of A' s interest in exchange for $100,000 cash, no gain would be recognized since A would have sufficient tax basis to absorb the distribution. A could then transfer the $100,000 to B in a nontaxable Sec. 1041 transaction. However, A would be left holding an interest in XYZ worth $100,000, with a zero tax basis.

If A were to instead transfer 50% of her interest in XYZ to B and XYZ were to redeem his interest, the result could be different. Immediately after the transfer, B and A would each hold an interest in XYZ worth $100,000 and with a tax basis of $50,000. As B' s redemption would not be a transfer between spouses (or a payment on a spouse's behalf to a third party), it likely would not be protected under Sec. 1041. Thus, the redemption would be a taxable event to B , who would recognize $50,000 of income. However, this recognition would be a potential benefit to the remaining partners of XYZ (including A ), who might be able to increase the tax basis of XYZ' s assets under Sec. 734.

Generally, an LLC or other similar entity that is solely owned by a single spouse will be treated as a disregarded entity. This disregarded-entity treatment can also apply when spouses share ownership as a result of their residence in a community property state. However, disregarded-entity treatment does not apply to LLC interests held by spouses in separate property states—those entities must generally be treated as partnerships for tax purposes. Therefore, one can imagine many scenarios where transactions taking place as part of a divorce can create, or dissolve, a partnership for tax purposes.

Example 2: Prior to the divorce, AB LLC was held solely by A (or by both spouses as community property). If the divorce results in ownership of AB LLC by both A and B , the entity is no longer disregarded and is now subject to rules and regulations of Subchapter K, including the requirement to file a partnership return. Conversely, if AB LLC had been held 50/50 in a separate property state and the divorce left A as the sole owner, the entity would cease to exist for income tax purposes.

Often, the marital home is one of a couple's most significant assets. While Sec. 1041 prevents the recognition of gain on the transfer of this asset from one spouse to another, the implications of a later sale of the home should be analyzed. Sec. 121 allows a married couple to shelter $500,000 of gain related to the sale of a primary residence in which they have lived for two of the past five years. In addition, for purposes of the "two of the past five years" test, an owner may treat periods when his or her former spouse inhabited the home pursuant to a divorce decree as if the owner were still living in the home. However, if the property is not held jointly after divorce (and the selling spouse is not remarried), the selling spouse is able to shelter only $250,000 of gain upon sale of the residence. Thus, if the intent is to sell the home shortly after the divorce, it may be beneficial to enter into an agreement to sell the home jointly and split the proceeds.

Lastly, it is critical that taxpayers receive a qualified domestic relations order (QDRO) if retirement accounts are transferred under the divorce decree. The QDRO must include the name and mailing addresses of both the plan participant and the alternate payee.

In conclusion, taxpayers should work with their accountants and attorneys to ensure that a divorce is a nonrecognition event and that property rights are dissolved in the most tax-advantaged, or at least tax-neutral, manner.

Editor Notes

Mindy Tyson Weber is a senior director, Washington National Tax, for RSM US LLP.

For additional information about these items, contact Ms. Weber at 404-373-9605 or [email protected] .

Unless otherwise noted, contributors are members of or associated with RSM US LLP.

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  1. Consultant's Corner: Transferring Business Ownership to a Spouse

    2. LLC ownership transfer agreements. Business interests (entire or partial) are customarily transferred to family members, including spouses, through a sale, gift, or inheritance, all three of which can have legal and tax implications. Generally speaking, transferring membership interests, or membership certificates in an LLC from one family ...

  2. Transferring business interests to family can preserve wealth

    Thus, parents with four children could transfer to the children's interests in the business that total $112,000 each year, without reducing the unified tax exemption they each enjoy ($28,000 x four donees). With effective discounting the interests, this $112,000 represents a much larger value to the children.

  3. How to Transfer Your LLC to a Family Member

    We call it an assignment of ownership interest. In that document, you simply recite that you are an owner of the business in such and such a percentage, and that you hereby or give such and such as percentage or amount to the person you want to give it to. Sign it, date it, have it notarized. That actually acts as a formal transfer of ownership ...

  4. How To Transfer LLC Ownership (2024 Guide)

    Most LLC operating agreements include a buy-sell agreement and other language relating to the transferability of LLC membership interests. A buy-sell agreement is a contract among the LLC's ...

  5. Handling Gifts and Bequests of LLC Interests

    Any transfer of an interest in an LLC classified as a partnership to a family member is subject to the family partnership rules of Sec. 704(e). Because LLCs can be used to shift income and property appreciation from higher-bracket, older-generation taxpayers to lower-bracket children and grandchildren, these rules are designed to enforce two ...

  6. Transfer of Membership Interest in LLC: Everything to Know

    Updated October 29, 2020: The transfer of membership interest in LLC entities is done through an LLC Membership Interest Assignment. This document is used when an owner (member) of an LLC wants to transfer their interest to another party. They are typically used when a member plans to leave or wants to relinquish their interest in the business.

  7. How to Transfer LLC Membership Interest

    It is important to note that a member-owner does not need to maintain an interest in the company. In general, members are usually granted the right to sell, purchase, assign, and/or transfer interest in the LLC. To learn more about their rights, members should consult the LLC's operating agreement, other contracts, and applicable state laws.

  8. LLC Membership Interest Transfer Agreement: Everything You ...

    An LLC membership interest assignment document is used when a member of a limited liability company wants to transfer all of his or her interest in the business to another party. This document is used when an LLC member is leaving or wants to give up his interest in the company altogether. The law will allow the ownership interest to be ...

  9. LLC Transfer Of Ownership Form: Everything You Need to Know

    As an LLC transfer of ownership form must be planned in advance; it's important to create provisions for these situations in the Operating Agreements regarding changes in ownership. The Operating Agreement will also contain provisions for other events such as the passing of a member, introduction of a new member, divorce, retirement, and buy ...

  10. How to transfer ownership of an LLC

    Once you have reached the terms of the sale, you can memorialize the terms in a preliminary memorandum or change of ownership letter. When both parties are satisfied, you can move forward with a formal transfer of business ownership agreement, which is executed just like any other type of contract according to your state's laws.

  11. Transferring Private Company Interest in Divorce

    3. Confirm Broad Transfer of All Rights by Divesting Spouse. The provisions that confirm the transfer of ownership in the business by the Divesting Spouse need to be broadly described in the ...

  12. Transferring LLC Membership Interests Part 1—An Overview

    The answer depends on how transferable those membership interests are. A transfer of LLC membership interests can mean selling, donating, assigning, or gifting—basically one LLC member turning over his or her membership interests to another individual or entity. The transfer can be voluntary or involuntary.

  13. A Guide to Transferring Ownership of an LLC at Death

    Alternative Non-Probate Transfer Methods for LLC Interests. However, there is an alternative for individuals who would like to transfer their LLC interests without the need for probate. Under both South Dakota and Iowa law, an interest in an LLC is considered personal property subject to the same titling rules that govern other forms of ...

  14. A Simple Succession Planning Tool For Single-Member LLCs

    For a single-member LLC, the operating agreement could state that the member's LLC membership interest is to be transferred immediately upon death to a spouse, son or daughter, or other person. If there is no operating agreement, the membership interest could be certificated and the certificate issued to "X, transfer on death to Y."

  15. Transfer of LLC Interest in Divorce: A Step-by-Step Guide

    Determining the value of a Limited Liability Company (LLC) is a crucial step in handling it during a divorce. The value of the LLC will influence the division of assets between the spouses. In this section, we will explore various valuation methods commonly used to ascertain the worth of businesses like an LLC.

  16. LLCs Co-Owned by Spouses (Guide to a Husband & Wife LLC)

    An LLC co-owned by spouses, also referred to as Qualified Joint Venture LLC, is a special federal tax classification. It is a disregarded entity in which the husband and wife are the only limited liability company members and each spouse has an ownership interest of at least 50%. Since the married couple is recognized as a single entity, the ...

  17. Tax Issues to Consider When a Partnership Interest is Transferred

    Example - Partner A, an individual, transfers his 55% partnership interest to Corporation D, a C corporation with a year-end of June 30. Prior to the transfer, the partnership had a calendar year-end. As a result of the transfer, the partnership will be required to change its tax year to June 30 because Corporation D now owns the majority ...

  18. Transferring Company Ownership Interests in Divorce Settlements

    Documentation of Transfer of Full Ownership Interest. The final issue of concern to the Transferee spouse is to ensure that the entire interest of the Transferor spouse is obtained in the transaction.

  19. How to Transfer LLC Membership Interest

    If the operating agreement doesn't cover transferring interest, then read the applicable state laws regarding LLCs. Determine the worth of the membership interest. Complete the required tasks and paperwork. Acquire a transfer document. Sign and date the document. When looking through the LLC's operating agreement, search for the section that ...

  20. How to Transfer an LLC Membership Interest

    A transfer of an LLC interest where compensation is being paid is treated as a sale or exchange. The selling member will usually have a taxable gain or loss on the sale. Even where the two members agree that the departing member is getting nothing for his interest, if the LLC has liabilities if the transaction results in a decrease in the ...

  21. Gifts of Partnership Interests

    If the donor partner recognizes a gain on the deemed sale of an interest in a partnership and the partnership made a Sec. 754 election, the partnership should adjust the basis of its assets to reflect the gain. Any transfer of an interest in a partnership to a family member is subject to the family partnership rules of Sec. 704(e).

  22. Beware

    By: Tamara Pow Your gift or sale of an LLC interest to a family member may be disallowed for tax purposes. If you are gifting or selling a limited liability company ("LLC") interest to a family member, you must keep in mind the requirements of Internal Revenue Code Section 704(e). IRC (section sign) 704(e) provides that a gift or sale to a spouse, ancestor or lineal descent (or trust for ...

  23. Tax Considerations for Divorcing Spouses

    This item outlines considerations for managing and correctly timing a marital property settlement from a tax perspective. The first key provision is Sec. 2516, a gift tax rule that renders nontaxable certain payments and transfers between former spouses that would otherwise be taxable. However, Sec. 2516 applies only to payments and transfers ...