Stock and Membership Interest Purchase Agreements: How to Come Out on Top in the Sale or Purchase of Your Company

How to Structure and Execute a Stock or Membership Interest Purchase Agreement
Buying or selling ownership in a business through a stock or membership interest purchase agreement is a major transaction with legal and financial consequences. Whether you’re acquiring shares in a corporation or membership units in an LLC, the following step-by-step guide explains how the process works and what to watch for along the way.

Step 1: Understand What You’re Buying (or Selling)
Before drafting any documents or negotiating terms, the parties must first understand the nature of the transaction. In a stock or membership interest purchase, the buyer acquires the seller’s entire ownership stake in the company. This includes not just voting rights or equity, but the full legal structure of the business—along with its contracts, assets, liabilities, and obligations. This structure differs significantly from an asset purchase, where the buyer cherry-picks which assets or liabilities to assume. While an asset purchase may offer more control and lower exposure to risk, it typically requires more documentation, third-party consents, and administrative effort. For more information read our blog Asset Purchase Agreements: How to Come Out on Top in the Sale or Purchase of Your Company.

Stock or membership interest purchases are often preferred for their operational continuity—the company remains unchanged, and contracts or licenses generally do not need to be reassigned. However, buyers take on all known and unknown liabilities of the business, which means due diligence is critical. A comprehensive review of the company’s financial records, tax filings, legal compliance, intellectual property, material contracts, and any pending litigation should be completed before moving forward.

Step 2: Review the Company’s Governing Documents
The next step is to examine the company’s governing documents to determine how a transfer of ownership must be handled. In the case of an LLC, this means reviewing the operating agreement; for corporations, it’s usually the shareholder agreement or bylaws. These documents often contain restrictions on how ownership can be transferred. Some require the approval of a majority or all members, while others impose rights of first refusal, buy-sell provisions, or limitations on who can become a new member or shareholder.

It’s important to identify whether any internal approvals or third-party consents are required. In many closely held companies, the governing documents are designed to prevent unwanted individuals from acquiring ownership. Understanding and complying with these requirements early in the process helps avoid delays and ensures that the transfer will be legally enforceable.

Step 3: Negotiate and Draft the Purchase Agreement
Once the structure is determined and the governing documents reviewed, the parties can begin drafting the purchase agreement. This contract is the heart of the transaction and should be prepared with the assistance of experienced legal counsel. The agreement typically opens by identifying the parties involved, summarizing the background of the transaction, and defining important terms. Definitions like “material adverse effect” and “knowledge” can be heavily negotiated, as they significantly influence how risk and liability are allocated.

The agreement must clearly state the purchase price and explain how it will be paid—whether in cash at closing, through promissory notes, by issuing buyer equity, or with future earn-outs based on business performance. It should also describe the exact ownership interest being transferred, including the class of shares or units, voting rights, and any transfer restrictions or rights attached to them.

Next, the agreement outlines representations and warranties. The seller will confirm that they have the legal authority to enter the agreement, that the business is in good standing, that financial and legal disclosures are accurate, and that there are no undisclosed liabilities or pending disputes. The buyer typically provides fewer representations, but will affirm they have the authority and financial capacity to complete the purchase. Covenants may also be included, both before and after closing. These can range from promises to operate the business normally until the transaction is complete, to restrictions on competition or solicitation after the sale.

The agreement should also include clear closing conditions—such as the buyer obtaining financing or the seller receiving necessary consents—as well as procedures for terminating the deal if those conditions aren’t met. Indemnification provisions are crucial, as they explain how liability for breaches or misstatements will be handled, who pays, and how claims must be presented. Lastly, the agreement will include general legal terms covering dispute resolution, governing law, confidentiality, and how costs are allocated.

Step 4: Handle the Logistics of LLC Membership Transfers
If the transaction involves a limited liability company, additional documents may be necessary to formalize the transfer. The core document is typically the Membership Interest Transfer Agreement. This contract sets out the terms of the sale, confirms that both parties are authorized to act, and may include provisions related to confidentiality, non-solicitation, or non-competition.

In many cases, a separate Bill of Sale is also prepared. This document formally records the transfer and the amount paid, serving as an official record for tax and administrative purposes. Depending on the operating agreement, consent from other LLC members may be required before the transfer is effective. Even if such consent isn’t legally required, it is often advisable to have all current members acknowledge and approve the transaction to minimize future disputes. The signed agreements, along with the bill of sale and any member consents, should be securely stored for future reference.

Step 5: Finalize the Sale and Transition Ownership
With the agreements signed and the purchase price paid, the final step is to update all internal and external records to reflect the change in ownership. The company’s ownership ledger or cap table must be updated, and any filings required by the Secretary of State—particularly for LLCs—should be promptly completed. The IRS responsible party designation must also be updated using Form 8822-B. Access to company bank accounts, vendor portals, and internal management systems should be transferred to the new owner. In certain cases, the company must also notify vendors, customers, or business partners—especially where contracts contain change-of-ownership provisions.

It’s important to keep all executed agreements, consent forms, and post-closing notices in a secure and easily accessible location. These documents may be needed later for tax filings, audits, or potential legal issues. Careful attention to these closing steps helps ensure that the transfer is complete, enforceable, and recognized by all relevant parties.

Need Help with the Process?
At GLO, we guide buyers and sellers through every stage of stock and membership interest transactions. From reviewing governing documents and negotiating key terms to preparing transfer agreements and handling compliance, we help ensure your deal is clear, enforceable, and structured to protect your interests. Read more about how GLO can help by visiting Stock and Membership Interest Purchase Agreements. Whether you’re transitioning out of a business or stepping into a new opportunity, we’ll help you do it right.

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GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific signed fee agreements. GLO does not guarantee any results.

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