Which Contract To Sell An LLC?

Question

Hi All,

I am wholesaling a property by selling  the LLC I created for the property.  My question is,  what contract do I use to represent this agreement to sell and buy the LLC?  A regular assignment contract doesn't seem correct since it represents a real estate transaction rather than a business transaction.  Thoughts?

Thanks!  Alison

Bill Gulley · Answer

Your contract really isn't a real estate sales agreement but an agreement for the sale of a business. There may be some guru contract floating around for RE investors, but the agreements I have been a party (seller/buyer) have been specifically drawn for that transaction. You can make it as simple or as involved as you think necessary, but I lean toward a more involved wordy contract...the hold harmless and indemnification agreement alone is a page, sometimes more.

Things to cover;

You'll need to assign the company name with the Secretary of State where your company is registered. I also suggest you replace the Registered Agent (if it is an/was an attorney). Each and every member of a small LLC should sign off on the assignment according to the by-laws and state law. While state law may authorize a single member to assign all assets of a corporation, I simply prefer to see everyone named to sign off making it crystal clear that they are assigning all of their rights in and to the corporation.

The Bank: You'll need to assign all accounts, escrows, checking, maintenance, or what every you may have  in the name of the corporation. In your contract I'd suggest you state the balance and account numbers.  In a contract such as this it is not necessary to include the full account number, but enough of the number so as to positively identify the account. In our new world of privacy you don't want bank account numbers floating around in public. I usually leave off the last three digits and replace them with letters (A, B, C,) etc. Then it is easier to referrer to the accounts as ABC, DEF, AAA and so on. You likely won't have too many seperate accounts and you may simply close accounts that are not necessary.

Signatures cards at the bank will need to be changed and the bank may have account forms naming officers and contact information.

A statement in your contract should assure that there are no UCC or tax filings against any asset of the corporation and that all accounts are free of any encumbrance.

You should provide a certificate of good standing from the Sec. of State for settlement. A copy should be attached as an addendum to your contract, IMO.

Business licenses need to be terminated by the seller and renewed or filed by the buyer. Some places require bonds and insurance so you'll need to state you settlement date and apply for refunds on  bond/ins premiums.

Personal property records may need to be assigned for tax purposes at the county and declare taxable property to the assessor.

You'll need to see your tax preparer to file applicable tax forms from the sale and for income declarations as well as any application to change accounting methods or tax treatment of the company.

In a real estate company you'll need to clear the old officers/directors and members with the State Real Estate Commission according to the license requirements for those positions and set any Broker Manager.

Signs, letterhead, business cards, logos, copy rights and patents, if any (lol) should be described in the sale contract as well as all books, records, accountings and related working papers (so that an audit may be performed). That should also be in the wording of your contract as a buyer especially, saying that all such documents will be delived in good form as necessary for any audit. It's not that you need a CPA to actually audit the company (but you could) but that you will deliver all source documents so that the new owner can make heads or tails of what was done. (Again, a good reason to keep your books in accordance with GAAP).

Insurance assignments can get complicated as I have had losses during a sale, but generally you may want to address any loss in the same way as customary in a real estate sale contract, assigning any losses to the buyer and continue to sell or avoiding the contract and losses retained by the seller.

Any significant asset or titled property needs to be listed (generally in an addendum) with the nominclature, serial number and by title as required by state law. I would not list a weedeater, as I would say misc. equipment but a John Deer riding mower and attachments is significant.

You'll need an assignment of rents and escrows statement in your contract with a cut off (settlement) date. I have always used a form letter to inform tenants of new management and in some places such may be required. Leases are not assigned if in the company name but it is good practice to inform tenants and introduce new owners.

Utilities need to be assigned only as to any personal guarantee which is customary with utility companies.

Following a real estate sale contract with disclosures made and assurances is customary, stating that there are no outstanding liens or encumbrances on a property and that title is in good insurable form in the name of the company.

If you finance any part of the sale the note holder should have a UCC filing for collateral purposes on any and all assets and such should be stated in the sale contract. Real property is mortgaged. BTW, this does not come under the SAFE Act as it is commercial.

I'm doing this off the top of my head and seeing it is getting long, I'd really suggest you see an attorney for your contract and settlement. Talk to your insurance agent, tax advisor, attorney and title company, for starters....Good Luck!

Bill Gulley · Answer

I would not buy a company of any kind without sufficient due diligence, but if yours is limited as you mentioned and the buyer is OK with it, actually you don't need a contract to sell the LLC.

Contracts to sell assets are used to get buyers and sellers to a settlement transaction, after closing it's dead. If later on someone crys foul you can go back to the agreements as evidence of the intent to transact the business of settlement.Contracts are shown to settlement agents to provide guidance as to how the transaction is to be closed. A contract may show others, like an insurance agent that you are acquiring a property to be insured. Title insurance
 is set by a contract price for lenders at a loan to value, showing proof of the sale price.

But, if these aspects are not necessary, you really don't need a sale contract. Just change the membership!
 
As I mentioned, you can contact the Secretary of State and simply transfer the company by naming new members and showing the old ones as having been removed. It's as if board simply resigned and replaced its membership.

Now, for tax purposes you'll need evidence of a sale price or asset purchase amount, you could accomplish in the minutes of the LLC and a letter acknowledged by the buyer and selling members, such as a receipt. You don't attach any contract to tax forms, but it would be an audit trail of supporting documents. Don't forget to report the sale after settlement.

You should really run this by your attorney...I know everyone wants to get by on the cheap and get answers here, but for a hundred bucks you should at least get a conversation for a few minutes and advice maybe even a boilerplate agreement.....

Ibrahim Hughes · Answer

My Attorney had to draw one up for me as it involved the selling of shares in the LLC. I would consult an attorney.

Ibrahim Hughes · Answer

Alison:

The agreement My attorney drew up for me reads 'Stock Purchase Agreement (For a Limited Liability Company)'. It's 22 pages long and covers all of the concerns mentioned in this thread by others that a buyer would have.

Again, you should have an attorney draw one up for you to cover the laws in your state as well as your specific situation. The good thing is that you should only have to pay for the drafting of the agreement one time.

Another option is to Google Stephanie in Tampa. She's a wholesaler who may go by the name 'Tampa Steph'. If I'm not mistaken she uses the creation of LLC's to transfer REO's to rehabbers much the same way you're looking to do. She has a blog but I can't remember the name. Good luck.

Jeff S. · Answer

In fact, you are selling a business Alison Miller, and with it comes the assets and liabilities it contains.  I know you’re looking at this as a simple way to transfer title, but a wise buyer will want to do enough due diligence to confirm that there are no other obligations associated with its purchase, as enumerated above by Charles Perkins (i.e. would you buy a property without title insurance?).  I’m guessing that you’re not trying to evade taxes but are probably doing this to avoid deed restrictions?

Assuming a buyer is simply willing to take your word, you might check the Virginia Secretary of State website for LLC forms and fees here for info on transferring ownership of an LLC (or elsewhere if it’s not in your state, as I assumed).  Whoever helped you set up the LLC, should be able to help you transfer it.  In the end, you’ll likely need an attorney and maybe an accountant.

Sorry no one here is giving you the news you were looking for, but please let us know how it works out.

Jeff

Account Closed · Answer

My question is what are you trying to accomplish by putting the property into an LLC?

There are potential issues that can come up.  One is that this may be treated as a sham transaction if there is no economic reason for doing this other than tax avoidance.

Sounds to me like you are really selling an asset which means a purchase/sale agreement.  You might be able to do an assignment, but you would need to get everyone on board with that.

Alison M. · Answer

Thanks all for your thoughtful replies.   Let me supply a few more details to my question.

I'm selling an LLC that was created specifically to use to transfer the property from me to the end buyer.    It isn't a business and hasn't been used for any other purpose other than to buy the property in this transaction.  I created it last week when I got the property under contract, and will sell it next week to the end buyer and collect my wholesale fee.

My question is, what contract is used to sell the LLC that holds the property to the new buyer?

Account Closed · Answer

What Bill has described is the sale of a business.  Sometimes though a business sale is really a sale of assets.

When you buy a business you buy it's assets and liabilities.  There usually is more risk involved, but also more potential rewards.

Savvy buyers will do more due diligence when buying a business than would be expected when buying an asset or group of assets.  I for one would investigate to see that there aren't any pending claims against a company.  Unfiled taxes, lawsuits, insurance actions, consumer complaints, etc.  It is a bigger deal than just looking at a set of financial statements.

Which Contract To Sell An LLC?

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