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 the transfer of 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 done with the intent 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 set forth 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 for the benefit of 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 will have to look to state law. Once you determine the authority governing the transfer process—the operating agreement and buy-sell agreement or state law—be sure to 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 will have to work with the other LLC members to determine and agree upon the value of the membership interest.
Step 3 – Follow Transfer Process
Complete the LLC transfer process as determined in Step 1. Make sure you follow all requirements. For example, if the operating agreement requires the unanimous written consent of all LLC members (a common requirement), meet with all of the LLC members to obtain 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 determine 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; make sure to obtain 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 in order 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.
Making a proper transfer of membership interests requires the transferor to jump through a lot of hoops. The first step in the process is determining which hoops are required. Taking the time to properly transfer membership interests 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 important member rights. We also assist existing LLC members who want to properly transfer their membership interests in the absence of a thorough operating agreement.
Call the Business Law attorneys at Pratt Law Group at (972) 712-1515 today to learn more about our business services.