I have no idea how shares of a company get vested, the process. So my question concerns the documents needed to complete this transfer of shares. Both companies already exist.
The exact process will depend on the terms of the current charter and operating agreement of the LLC. A well drafted set of documents would address this issue. At the very least I would expect the following:
- a contract between the member selling/transferring his interest in the LLC (you) and the buyer/transferee of the interest (the Canadian corporation here) spelling out what interest the buyer/transferee is getting and what the seller/transferor is getting in return. That may be done as part of an amendment to the LLC charter/operating agreement or in addition to that.
- Amendement of the charter or operating agreement (usually the latter) reflecting the admission of the new member with the new member signing the operating agreement to ensure that he or she is bound by the rules of the LLC.
- A notation in the LLC recordbook of member interests reflecting the transfer of the member interest.
A vote of the current membership on admission of the new member may also be required. If the current charter and operating agreement do not allow transfer without such a vote my recollection is that for a Delaware LLC that vote is required. In that case, the LLC must hold that vote and record the results in its records, too, even if there is just a single owner of the LLC. The organizational procedural requirements still need to be followed to respect the separate existence of the LLC.
Delaware does not require the LLC to disclose who the owners of the LLC are. Some states do, but Delaware is not one of them, so you do not have to make any filing to notify the state of the change in member interests. It also does not matter that the owner of the member interests is a Canadian corporation. Nor are any filings required with the federal government necessary other than some things you'll need to do with the IRS.
You might want to meet with a corporate law attorney in Delaware to go over your charter and operating agreement and advise you on what you need to do for the membership interest transfer to be done correctly and for advice on changes you may want to have in your LLC documents now that you have another member. The lack of well drafted documents may come back to bite you hard later on if you don’t address it now.
For federal tax purposes, your LLC was treated as your sole proprietorship while you held 100% of the member interests unless you elected for it to be treated as a corporation for federal tax purposes. Most people do not do that, though. Assuming you did not make that election, then the transfer of the 10% member interest in the LLC to the Canadian corporation resulted in the formation of a partnership for federal tax purposes. The partnership will have to file a Form 1065 each year with the IRS. For that it must have its own tax identification number (TIN). The TIN for a business entity like a partnership is the Employer’s Identification Number (EIN). you can apply for that online with the IRS. Information on getting that may be found here: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employer-ID-Numbers-EINs
You may not realize this, but what you have done has significantly increased the complexity of your federal tax situation. Not only have you created a partnership, which has a lot of complexity on its own, but you have a foreign person (the corporation) as a partner, which subjects the partnership to the detailed withholding rules under IRC section 1446. I strongly urge you to consult a tax lawyer familiar with the § 1446 withholding rules to make sure you get everything right. Failure to get the withholding right can subject both you and the LLC to a lot of liability here. The Canadian corporation will have to pay tax in the U.S. on its share of the partnership’s U.S. source income. It will need an EIN, too, if it does not already have one.
If you did elect corporate treatment for the corporation, that will change how you deal with this. It is critical to note that if the LLC was treated as a S-corporation then the transfer of any interest in the entity to a foreign person automatically terminates the S-corporation status and converts it to a C-corporation. That would have significant tax consequences for you and the corporation.
On the Canadian side, the LLC is generally treated as a corporation for Canadian tax purposes. Thus for the Canadian corporation that is likely to be advantageous. The Canadian corporation will want to consult a tax lawyer in Canada about what particular things it might need to meet its obligations in Canada.