You may not always have a breakthrough idea for starting a business and sometimes buying a business becomes a lucrative option. But can you directly buy an LLC like you would an asset?
A Limited Liability Company cannot be bought like physical assets such as a car or a house. However, it’s possible to buy ownership interest in an existing company and become a member of the LLC.
Read on to learn the key steps in buying an LLC along with legal elements to keep in mind.
Why You Should Buy an LLC
Buying an LLC, or more specifically, buying ownership interest in an existing LLC, can offer several advantages.
Here are five reasons why you might consider buying an LLC:
- Limited Liability Protection: One of the main advantages of an LLC is that it provides its members with limited liability protection. This means that the member’s personal assets are generally protected from the debts and liabilities of the entity. If the LLC is sued or goes bankrupt, the member’s personal assets are not at risk.
- Established Business: When you buy an existing LLC, you are buying an established business with a track record of operations, customers, and revenue. This can save you the time and effort of starting a new business from scratch and can provide you with an immediate income stream.
- Tax Advantages: LLCs offer several tax advantages, including pass-through taxation. Meaning the LLC’s profits and losses are passed through to the member’s personal tax returns and the LLC itself does not pay federal income tax. In addition, LLCs may qualify for certain tax deductions that can reduce members’ tax liability.
- Easier Access to Funding: An established LLC with a strong financial history may have an easier time accessing funding than a new business. This can be especially important if you are looking to expand the business or invest in new equipment or technology.
- Flexibility: LLCs offer a high degree of flexibility in terms of ownership structure and management. For example, an LLC may have a single member or multiple members, and members may choose to manage the LLC themselves or hire a manager.
How to Buy an LLC in 5 Steps
If you’re considering acquiring an LLC, it’s essential to follow a series of steps to guarantee a seamless transaction.
Whether your goal is to obtain full ownership of an LLC or acquire a partial ownership stake, it’s crucial to be familiar with the necessary procedures.
Here is a five-step guide to assist you in navigating the process of purchasing an LLC:
1. Find an LLC Business for Sale
The first step in buying an LLC is to find a company that is for sale. There are several ways to find LLCs for sale, including online marketplaces, business brokers, and networking with other business owners.
For example, websites like BizBuySell and BusinessesForSale.com are online marketplaces where you can search for an LLC for sale in your area or a specific industry.
Business brokers are also a valuable resource, as they can put you in touch with LLC owners interested in selling their businesses.
2. Start Negotiating With LLC Owners
After you find an LLC for sale, the next step is to start negotiating with the current owners. This involves discussing the terms of the sale, such as the purchase price, the percentage of ownership interest to be sold, and any contingencies that may arise.
You must go into the negotiations with a clear idea of your goals and the value of the business to be acquired.
Consider hiring an accountant or attorney to facilitate the negotiations and ensure that all legal and financial aspects of the transaction are properly addressed.
3. Exercise Due Diligence
The third step in buying an LLC is to conduct due diligence, i.e., a thorough investigation of the company to verify its financial and legal situation.
As part of the due diligence, you will review financial statements, tax returns, legal documents, contracts, and any other relevant information about the LLC.
You may also conduct interviews with employees and customers to gain insight into the company’s operations and reputation.
This information will help you evaluate the risks and rewards associated with the investment and determine if the purchase price is reasonable.
Some of the key areas to investigate during your research include:
- Financial Performance: Review the LLC’s financial statements, tax returns, and cash flow projections to assess its profitability and financial health.
- Legal Compliance: Verify that the LLC complies with all applicable laws and regulations, including licensing requirements and environmental regulations.
- Contracts and Agreements: Review any contracts, leases, or other agreements that the LLC has entered into to identify any risks or liabilities.
- Intellectual Property: Verify that the LLC has proper ownership or licensing rights to any trademarks, copyrights, or patents that it holds.
If you discover any red flags as you research, you may need to renegotiate the terms of the sale or walk away from the transaction altogether.
4. Finalize Purchase Agreements and Other Related Documents
The fourth step in buying an LLC is to finalize the purchase agreements and other related documents necessary to complete the transaction. These documents vary depending on the specific terms of the sale but may include the following:
- Purchase Agreement: This document outlines the terms of the sale, including the purchase price and the percentage of ownership interest being sold. The purchase agreement should be reviewed and signed by both parties before the sale is finalized.
- Operating Agreement: This document outlines the rights and responsibilities of the LLC’s members, including management structure, voting rights, and profit distribution.
- Bill of Sale: This document transfers ownership of the LLC’s assets to the buyer.
- Assignment and Assumption Agreement: This document transfers the LLC’s contracts, leases, and other agreements to the buyer.
- Closing Statement: This document summarizes the financial aspects of the transaction, including the purchase price, closing costs, and any prorations or adjustments.
Once the documents are finalized, the sale can be completed. However, it is advisable to consult a lawyer or accountant to ensure that the documents are properly drafted, and your interests are protected.
5. Notify Your State About the LLC’s Change of Ownership
The final step in buying an LLC is to notify the state where the LLC is registered about the change of ownership. This typically involves filing an amendment to the LLC’s articles of organization to reflect the new ownership structure.
The specific requirements for notifying the state vary depending on the state in which the LLC is registered. Generally, you must provide the state with the following information:
- The name and address of the LLC
- The names and addresses of the new members
- The percentage of ownership interest held by each member
- The effective date of the change in ownership
In addition to notifying the state, you may also need to update the LLC’s tax and financial records, as well as any contracts or agreements that are affected by the change in ownership.
Things to Consider Before Buying an LLC
While buying an LLC can be advantageous and exciting, there are some things to keep in consideration.
Here are three things to keep in mind before buying an LLC:
- Existing Liabilities: One of the potential disadvantages of buying an existing LLC is that you may inherit any existing liabilities or debts. This may include litigation, outstanding loans, or tax liabilities. Due diligence on the LLC’s financial and legal situation is critical to avoid assuming unexpected liabilities.
- Price: The price of an LLC can vary widely depending on its size, location, and financial performance. Carefully consider the purchase price and make sure it is reasonable based on the business’s financials and future growth potential. Overpaying for an LLC could result in financial loss or difficulty repaying your investment.
- Business Reputation: If the LLC you want to buy has a bad reputation or negative reviews, it might be difficult to overcome that reputation and build a successful business. Thoroughly review the company’s reputation and online presence before buying to make sure it aligns with your goals and values.
In addition to these potential disadvantages, you should carefully weigh the financial and legal risks of buying an LLC before making a purchase. As mentioned earlier, working with an attorney, accountant, or other financial advisors can help you navigate these risks and mitigate any legal liabilities.
Your Ultimate Guide to Buying an LLC
Purchasing an LLC isn’t as straightforward as buying a car, but you can invest in an existing company and become an active member.
This approach offers various benefits and can open up profitable business opportunities that might not have been achievable otherwise.
Nevertheless, acquiring or investing in an LLC can be complex. To circumvent these challenges, consider seeking professional assistance.
This is where we step in. At doola, our team of bookkeeping experts can help you get organized and navigate the complex legal terminology, allowing you to concentrate on tending to your new business.
Contact us today for a free consultation with one of your leading experts.
Can you buy an LLC online?
Yes, several online sources provide a marketplace that offers LLC businesses for sale.
How do you know if an LLC is right for you?
To know if an LLC is right for you, you must carefully weigh the risks and benefits of the LLC. Working with an accountant or business partner can help you minimize risks and make wiser decisions.
How to buy an LLC name?
To buy an LLC name, you can register it with your state’s Secretary of State if it’s not already in use. Check the availability of the name and then complete the registration process with the appropriate forms and fees.
How to buy out a partner in an LLC?
To acquire a partner’s share in an LLC, you must discuss the buyout conditions, including the acquisition price, the portion of ownership interest being sold, and any potential contingencies. After agreeing on the terms, both parties should draft, review, and sign a purchase agreement to finalize the transaction.
How to buy a house with an LLC?
To buy a house with an LLC, first, establish the LLC, then purchase the property under the company’s name using the LLC’s funds or financing. This approach helps protect personal assets and can offer tax advantages.