It is not enough to just cover the basics of setting up an LLC in California.

You can have a validly existing LLC in California and, at the same time, be unprepared. Unexpected and unwanted things happen in business; sales drop, rent increases, employees quit, business partners leave, and additional members come along.

As a responsible LLC member, it’s your job to prepare for such events. One crucial thing you should know is how to go through a change of ownership in an LLC in California.

And to properly anticipate this, naturally, you might want to think of the causes why LLC ownership changes in the first place.

What causes a change in ownership in the LLC? 

There are several reasons that can trigger a change in ownership in your business. In this article, we discuss some of them and help you navigate the situation that fits you.  

Change in ownership can happen when an LLC member dies. 

Just like in other states, a change in ownership in an LLC in California can happen when a member dies. 

The consequence of a member’s death is one of the basic and crucial points that you should include in an LLC operating agreement. It should also contain a provision stating that the remaining members can acquire the deceased member’s share; this is called a buyout clause or agreement. Or instead of a buyout clause, the operating agreement can state that the death of a member shall result in the outright dissolution of the LLC. 

So, if you want to avoid an unexpected dissolution, covering this point in your operating agreement will certainly help. 

What happens then if a member’s death results in LLC dissolution? 

In case of a dissolution, the deceased member’s personal or legal representative will have the right to an account of the LLC’s transactions from the date of dissolution. 

The exception? If the operating agreement provides otherwise. 

What if a single LLC member dies?  

It depends. Generally, in case of death of the single LLC member, his status and membership interest may pass to the heirs, successors, and assigns by will or applicable law.  

The exception? If the operating agreement provides otherwise. 

Change in ownership doesn’t only happen if there is a decrease in the number of LLC members; existing LLC members can add a new one.

LLC members usually add a member for the purpose of acquiring a certain kind of benefit from the prospective business partner. The benefit can come in the form of a capital, a specific property contributed by the additional member or a skill that existing members want to have in the company. 

 What should you do before you add a member?

You should check the operating agreement for the required number of member votes needed to affect the addition. If there is no operating agreement or if the existing agreement does not provide for the required number of votes, then the law of the state will apply.  

To effect a change in ownership in an LLC in California by adding a member, it’s required that majority of the existing members should approve or give their consent.

If an LLC member totally wants out, he can sell his membership interest in the LLC. 

The operating agreement may have provided for a right of first refusal to the other LLC members. This means that if you want to sell your interest in the LLC you should offer your interest to the remaining members before you can offer it to someone else outside the company. 

The operating agreement may cover the method of calculating the value of the interest to be sold. It may also tell you the required member votes to allow the transfer of interest.  

What if the members cannot agree as to the price? 

The member can opt to dissociate from the LLC. 

When a member wants out but wants to keep his interest in the LLC, he can go through the process of dissociation. 

Can a member just dissociate himself from the LLC? Yes, but not without some legal requirements. 

The Revised Uniform Limited Liability Act says that a person has the power to dissociate as a member at any time, rightfully or wrongfully, by withdrawing as a member, but the LLC should have notice of the person’s express will to withdraw. 

 What’s the effect of dissociation?

Dissociation doesn’t really cause a change in ownership in an LLC in California. What a dissociated member loses is merely the right to actively participate in the management of the business. 

If you’re a dissociated member you still hold an economic interest in the LLC. This means you still share in the LLC’s profits and losses. It also means that you still have the right to a share in the distributed assets in case of dissolution. 

Can members dissociate another member? 

Yes, that’s involuntary dissociation. Members can dissociate another member if it has become unlawful to retain a member or if there has been a transfer to all his transferable interest in the LLC.  

The operating agreement can provide for the events or causes that can result in the dissociation of the member. 

Other causes of dissociation: 

• A court can also issue an order finding that the person has become incapable of performing his duties. 
• A person can also be expelled as a member by the unanimous consent of all the other members. 

Indispensable steps you need to follow when changing ownership in an LLC in California.

1. Check your operating agreement or articles of organization.

   Both of these articles usually contain provisions for changes in an LLC ownership. It can help you in the process of voting and withdrawing members, conducting a vote, and the percentage of votes required to add a member.

2. Conduct a vote among your LLC members when adding a member.  

   Whether the required vote is unanimous or just a majority, it depends on the operating agreement; if there are no existing provisions in the operating agreement or article of organization, the California law supplies a default procedure.

3. Fill out a 100B form.  

   This is called the “Statement of Change in Control and Ownership of Ownership of Legal Entities”. You’ll need this form when the transfer or sale of the membership interest involves a change in control or ownership of the business, and the LLC owned or leased an interest in California real property.

4. File a Statement of information (LLC-12) to make the change in the members or managers of the LLC official.  

   You can do this through the California Secretary of State website.

Who should file this form? 

The 100B Form or Statement of Change You should file this if you’re the one acquiring the mentioned control or ownership. 

At Incorporation Attorney, we can help you understand the process of changing ownership in an LLC

Change is never easy. It’s uncomfortable and it makes you feel vulnerable. When dealing with change, it’s best to arm yourself with preparations. A change in ownership involves corporate documents and filing forms that are overwhelming and confusing. At Incorporation Attorney, we created a service that can help you manage these documents. We do this in a way that is tailored to your needs, making it hassle-free for you and your LLC members.  

Contact us today and we can start discussing the best option for you.