Selling or giving away part of an LLC is two separate questions, not one. The first question is state law: what does the buyer actually receive? The second question is tax: does the buyer have to hold back part of the price and send it to the IRS?
The two questions have different answers, and neither one tells you the other. Founders who only think about the first one sometimes get a bill for the second.
The state-law answer is smaller than most people expect. Under Delaware law, transferring your interest moves the money and leaves the control behind. The tax answer turns on one fact: whether the seller is a foreign person, and whether the LLC is taxed as a partnership. If both are true, the buyer must withhold 10% of the amount realized.
What the rules actually require
The state-law part: 6 Del. C. § 18-702
Delaware's LLC Act sets a default rule. Unless your operating agreement says something different, a membership interest is assignable, in whole or in part.
Here is what the assignee gets, and what they do not get.
What the assignee gets: the right to share in profits and losses, and the right to receive distributions, to the extent the interest was assigned. If you assign half your interest, the assignee collects half of what you used to collect.
What the assignee does not get: the right to participate in management. Under § 18-702, an assignee does not become a member of the LLC by the act of assignment alone. The assignee gets management rights only as the operating agreement provides, or, if the operating agreement is silent, on the affirmative vote or written consent of all of the members.
What the assignee is not on the hook for: unless the operating agreement says otherwise, an assignee does not take on a member's liabilities just by receiving an assignment. Those liabilities come with admission, not with the assignment.
What the assignor loses. Read § 18-702(b)(3) before you assume you keep your seat. Unless the operating agreement says otherwise, a member who assigns their entire LLC interest ceases to be a member. Assign half and you keep your membership. Assign all of it and you have given up the vote you thought you were keeping.
So a transfer can produce two very different results. In one, the buyer holds economic rights and no vote. In the other, the buyer is a full member. Which one happens is decided by your operating agreement, not by the price you agreed on.
One more thing about Delaware. The Delaware LLC Act does not impose a statutory annual report, a meeting requirement, or a minute-book duty on an LLC. Those obligations live in your operating agreement, if you put them there. (An LLC still owes Delaware's annual LLC tax and still needs a registered agent. That is a tax and an agent, not a report of who owns the company.) A corporation is different, and has statutory duties. Do not carry a corporation's habits over to an LLC, and do not assume the state is keeping a member list on your behalf.
The tax part: IRC § 1446(f)
The withholding rule works like this. When a foreign person transfers an interest in a partnership, and the gain on that transfer would be treated as effectively connected with a U.S. trade or business, the transferee (the buyer) must withhold 10% of the amount realized and pay it to the IRS.
The duty falls on the buyer, not the seller. Three details decide whether it bites.
Applicability dates. The withholding regulations apply to transfers that occur on or after 29 January 2021. The rules that make the partnership withhold when the buyer did not, under § 1446(f)(4), apply to transfers that occur on or after 1 January 2023 (IRS Notice 2021-51). The two dates are different.
Exceptions. Withholding stops if the buyer receives the right certification. The main ones, from 26 CFR § 1.1446(f)-2(b), are:
- A certification from the seller of non-foreign status, which states the seller's name, taxpayer identification number and address, and is signed under penalties of perjury.
- A certification from the seller that the transfer produces no realized gain.
- A certification from the partnership that, if it sold everything it owns at fair market value, less than 10% of its total net gain would be effectively connected with a U.S. trade or business.
- A certification from the seller that their share of the partnership's effectively connected income stayed under the regulation's thresholds in each year of the look-back period.
What happens if the buyer skips it. Under § 1446(f)(4), the duty does not disappear. It moves to the partnership itself. The LLC must then withhold the missing amount, plus interest, out of future distributions to that buyer. The buyer's failure becomes the company's problem, and the company will take it out of the buyer's money.
The scope limit that decides everything
§ 1446(f) applies to the transfer of an interest in a partnership, and only to that.
A single-member LLC that is disregarded for federal tax purposes has no partnership interest. There is nothing for § 1446(f) to attach to. When a foreign owner sells 100% of a disregarded LLC, the IRS treats the deal as a direct sale of the underlying business assets. That is a different regime with its own analysis, asset by asset. It is not an exemption from tax.
So the order of operations is fixed. First settle how the IRS classifies the LLC: disregarded, partnership, or corporation. Only then can you say whether 10% has to be withheld. Skipping that step produces one of two errors: withholding money that was never owed, or failing to withhold money that was.
🇺🇸 If the IRS counts you as a U.S. person
When you are the seller. No § 1446(f) withholding applies to your sale. But the buyer cannot see inside your tax status. The buyer's protection is a piece of paper, so give them one: a certification of non-foreign status that includes your U.S. taxpayer identification number and is signed under penalties of perjury. Hand it over before closing. A careful buyer will withhold 10% without it, and getting that money back means waiting for a refund.
When you are the buyer. The withholding duty is yours, and your own status does not excuse you. If the seller is a foreign person and the LLC is taxed as a partnership, you withhold 10% of the amount realized. Collect the certification before you wire the money, not after. Once the price is paid in full, you have no leverage left and the IRS still expects the 10%.
On the state-law side, § 18-702 applies to you exactly as it applies to everyone else. If you are buying, read the operating agreement and find the admission clause. If it does not admit you as a member, you bought profits, not power.
🌏 If it does not
When you are the seller, and the LLC is taxed as a partnership. The buyer must withhold 10% of the amount realized, not 10% of your profit. If you paid $80,000 for an interest and sell it for $100,000, and the LLC has no debt, the withholding is 10% of $100,000, not 10% of the $20,000 gain. You can be withheld far more than you actually owe, and the only way to get the excess back is to file a U.S. tax return and claim it.
Note that the amount realized is not always the cash price. Under 26 CFR § 1.1446(f)-2(c), it also picks up liabilities the buyer takes on and the drop in your share of the partnership's debt. If the LLC carries debt, the base can be larger than the cheque you receive.
The way to reduce the withholding is the certification route above: no realized gain, or the effectively connected thresholds. Each one requires a document, prepared before closing.
When you are the seller, and the LLC is a single-member disregarded entity. § 1446(f) does not apply. There is no partnership interest. The sale is treated as a sale of the business assets, and you need a separate analysis of what that means. Do not read "no § 1446(f)" as "no U.S. tax."
When you are the buyer. Being a non-resident does not remove the withholding duty. § 1446(f) puts the duty on the transferee, whoever the transferee is.
One structural change to watch. If a single-member LLC sells part of the interest, the company now has two members. A two-member LLC is not disregarded. Unless it elects to be taxed as a corporation, the IRS treats it as a partnership from that point on. The transfer you were worried about is over in a day. The change of tax classification lasts for the life of the company.
What changes when the seller is a foreign person
| 🇺🇸 Seller is a U.S. person | 🌏 Seller is a foreign person | |
|---|---|---|
| Does the buyer withhold under § 1446(f)? | No | Yes, 10% of the amount realized — if the LLC is taxed as a partnership and the gain is effectively connected income |
| What stops the withholding | Nothing to stop | A certification: non-foreign status (with U.S. TIN), or no realized gain, or ECI below the threshold |
| If the buyer withholds nothing | Nothing follows | The LLC itself must withhold the missing amount, plus interest, from future distributions to that buyer (§ 1446(f)(4)) |
| If the LLC is a single-member disregarded entity | Sale is treated as a sale of the business assets | Same structure, but the tax analysis is different and § 1446(f) does not apply |
| Delaware § 18-702 default | Interest is assignable in whole or in part | Identical |
| What the buyer receives without admission | Profits, losses and distributions only. No vote | Identical |
| Who decides whether the buyer becomes a member | Your operating agreement | Your operating agreement |
Common mistakes
🇺🇸 If the IRS counts you as a U.S. person
- Buying an interest from a foreign seller, paying the full price, and assuming withholding was the seller's problem. § 1446(f) puts the duty on the buyer.
- Signing a transfer document and assuming the buyer now has a vote. Under § 18-702 they do not, unless the operating agreement gives them one or all the members consent.
- Assigning your whole interest and assuming you still get to vote. Under § 18-702(b)(3), assigning all of it ends your membership unless the operating agreement says otherwise.
- Selling your interest without giving the buyer a certification of non-foreign status. The buyer then withholds 10% to protect themselves, and you wait for a refund.
🌏 If it does not
- Assuming § 1446(f) applies to any LLC interest. It applies to partnership interests. A single-member disregarded LLC does not have one.
- Reading "§ 1446(f) does not apply" as "no U.S. tax is due." An asset sale is a different regime, not a free pass.
- Thinking the 10% comes out of your gain. It comes out of the amount realized.
- Selling part of a single-member LLC and not noticing that the company has just become a partnership for federal tax purposes.
- Leaving the bank out of it. Under 31 CFR § 1010.230, a covered financial institution has to identify every individual who owns 25% or more of the company's equity, plus one individual who controls it, and collect a certification when the company opens an account. If a transfer moves someone across the 25% line, the certification the bank holds no longer matches the company. Expect the bank to ask for a new one.
FAQ
Does the person who buys my LLC interest automatically become a member?
No. Under 6 Del. C. § 18-702, an assignment by itself does not make the assignee a member. It gives them your share of profits, losses and distributions. Management rights come only as the operating agreement provides, or, if it says nothing, on the written consent or affirmative vote of all the members. One caution for the seller: under § 18-702(b)(3), assigning your entire interest ends your own membership unless the operating agreement says otherwise.
Is the 10% taken out of my profit or out of the sale price?
Out of the amount realized, not out of your gain. If you sell an interest for $100,000 in a debt-free LLC, the withholding is $10,000, even if your gain was much smaller. The amount realized also picks up liabilities the buyer assumes and the reduction in your share of the partnership's debt, so it can exceed the cash you receive. If too much was withheld, you recover the difference by filing a U.S. tax return.
I am not a U.S. person and I own 100% of a single-member LLC. Does § 1446(f) apply when I sell it?
No. § 1446(f) applies to the transfer of an interest in a partnership. A single-member LLC that is disregarded for federal tax purposes has no partnership interest, so the rule has nothing to attach to. The IRS treats the deal as a sale of the underlying business assets instead. That is a different analysis, and you should run it before you sign anything.
What happens if the buyer does not withhold?
The obligation moves to the LLC. Under § 1446(f)(4), the partnership must withhold the amount the buyer failed to withhold, plus interest, out of future distributions to that buyer.
Can I stop the withholding just by telling the buyer I am a U.S. person?
Not verbally. The exception runs on a written certification of non-foreign status that states your name, address and U.S. taxpayer identification number, and is signed under penalties of perjury. Without that document, a buyer who wants to be safe will withhold.
When did this withholding rule start?
The withholding regulations apply to transfers that occur on or after 29 January 2021. The rules that shift the duty to the partnership when the buyer fails to withhold, under § 1446(f)(4), apply to transfers that occur on or after 1 January 2023, following IRS Notice 2021-51.
Do I have to tell the state when the members change?
Delaware's LLC Act does not require an LLC to file an annual report listing its members, and it does not impose statutory meeting or minute-book duties on an LLC. Corporations are treated differently. Your evidence that a transfer happened is the paperwork you keep yourself: the assignment, the consent required by your operating agreement, and the updated member schedule. Rules vary by state, so check the filings your own state of formation requires.
Does my bank need to know about the transfer?
Yes, in practice. Under 31 CFR § 1010.230, the bank must identify each individual who owns 25% or more of the equity interests in the company, plus one individual with control. A transfer that pushes someone over or under 25% makes the bank's record wrong, and the bank will want an updated beneficial ownership certification.