An LLC affords its members a certain amount of personal asset protection. Part of this protection hinges on the restricted transferability of LLC membership interests. Restricted transferability protects the non-transferring members from creditors and unwelcome new members, which upholds the integrity and value of the non-transferring members’ membership interests.
- Most (but not all) LLCs impose requirements or restrictions on transferring a member’s interest.
- If the LLC’s operating agreement is silent on the transferability of interests, you must look to state law to be sure there are no default provisions restricting transferability.
This article, part 2 in a 3-part series, focuses on voluntary membership interest transfers intended to grant full membership rights to the recipient.
Step 1 – Determine the Transfer Process
The LLC’s operating agreement should specify the process for transferring a membership interest. If the LLC has a buy-sell agreement in place, that must also be consulted.
- Find the provisions that detail allowable transfers, the steps to complete them, and the method for calculating the value of the membership interest, if any.
- The membership interests may be freely transferable but are likely subject to restrictions in the operating agreement, the buy-sell agreement, or by state law.
- Some transfers may be permitted without prior approval of the other members, such as transfers to a member’s immediate family or to a trust to help a member or a member’s immediate family.
- The LLC or the other members may have a right of first refusal before a transfer can be made.
If the operating agreement or buy-sell agreement doesn’t specify the process for transferring a membership interest, you must look to state law. Once you decide on the authority governing the transfer process—the operating agreement and buy-sell agreement or state law—note all requirements and restrictions.
Step 2 – Determine the Value
Calculate the value of your membership interest. If the operating agreement or a separate buy-sell agreement doesn’t address this, you must work with the other LLC members to decide and agree upon the value of the membership interest.
Step 3 – Follow Transfer Process
Complete the LLC transfer process as determined in Step 1. Follow all requirements. For example, if the operating agreement requires the unanimous written consent of all LLC members (a common need), meet with all the LLC members to get their written consent.
Step 4 – Obtain or Draft the Transfer Document
If the LLC does not have a standard transfer document, you will need to draft a transfer document.
- Check the operating agreement or state law to decide what the transfer document must include.
- Typically, it must include the transferor’s name, the LLC’s name, the recipient’s name, and the percentage of the membership interest being transferred.
- If a form is not provided by the LLC, note that the form of the transfer document is usually subject to the LLC’s approval; get this approval if necessary.
Step 5 – Execute the Transfer Document; Other Documents
Sign and date the transfer document. Make a copy for your records, for the recipient, and for the LLC.
- The recipient typically receives the original transfer document.
- The LLC may have additional documents that the recipient must sign to be admitted as a member.
- State law may require the operating agreement and certificate of formation to be updated with the new member information.
- The LLC may pass the costs associated with the transfer to the new member.
Conclusion
Making a proper transfer of membership interests requires the transferor to jump through many hoops. The first step in the process is determining which hoops are necessary. Taking the time to transfer membership interests properly ensures that the recipient obtains full membership rights and protection.
We offer proactive business planning strategies. We help businesses draft thorough operating agreements that provide clear directions to the LLC members—to exercise membership interest transfers and other necessary member rights. We also help existing LLC members who want to properly transfer their membership interests through a comprehensive agreement. Contact us today to learn more about our business services.
NOTICE: The information on this website does not constitute legal advice. You should not rely on any information without seeking the advice of a competent attorney licensed to practice in your jurisdiction. This website is both a communication and/or solicitation as defined by California Rules of Professional Conduct, rule 1-400. For further information, please click here.
