A limited liability company (“LLC”) is a type of business formation that combines the limited liability benefits of a corporation with the tax advantages of a partnership. An LLC may be formed by one or more business owners. Business owners in an LLC are referred to as “LLC members.” Each LLC member will own a certain percentage of the business. The percentage they own is called an “interest” or a “share.”
It is important to note that a member-owner does not need to maintain an interest in the company. In general, members are usually granted the right to sell, purchase, assign, and/or transfer interest in the LLC.
To learn more about their rights, members should consult the LLC’s operating agreement, other contracts, and applicable state laws. In some cases, an operating agreement may name specific LLC members or appoint managers and officers to authorize transfers of LLC interests.
Finally, if you have questions regarding the rights of LLC members or need assistance transferring your interest in an LLC, you should contact a local business attorney for further advice. An attorney will be able to answer any questions you have about a particular legal issue and can help you navigate the transfer process.
Why Would I Transfer My LLC Interest?
There are a number of reasons why a person would want to transfer their LLC interest. Some of the most common reasons include:
- All the members want to sell or dissolve the entire company;
- An individual member wishes to leave the business;
- A current member wants an outside individual to join the business;
- A member dies or becomes incapacitated; and
- For financial or personal reasons (e.g., went bankrupt, got divorced, lost outside income from another job, wants to donate their interest to charity, and so on).
The procedure to transfer an LLC interest will depend on the provisions contained in an LLC’s operating agreement, related company documents, and state law. Thus, these procedures will vary widely across all LLCs. Most LLCs tend to create an operating agreement to ensure that their business runs smoothly and to protect them against future liability.
Using this default as an example, the procedure to transfer an LLC interest is as follows:
- First, identify the necessary steps to transfer an interest. Review company contracts, state laws, and any other paperwork. Check for guidance on any restrictions, when member approval or a vote is necessary, whether members have a right of first refusal, the types of transactions that are freely transferable, and so forth.
- Next, determine what percentage will be transferred and the value of that percentage. Confirm with other members that these numbers are accurate.
- Complete the transfer process by complying with the guidelines found in state laws and company agreements. This step will change significantly for each LLC since there are no uniform requirements.
- In some cases, a member may need to obtain or draft a transfer document. However, not every transfer will need one. For example, if state law requires it or a member is assigning (not selling) their interest, then they may need to draft or get a transfer document. A transfer document simply provides details about the transfer (e.g., member name, percentage of interest transferred, etc.).
- Finally, if a member is unsure whether all steps were satisfied, then they should consult a local business attorney for further advice.
Do I Have to Transfer All of My LLC Interests?
In general, LLC members can typically choose what percentage of their interest they want to transfer to another party. For example, they may decide to transfer half of their interest, some portion below or above half, or the entire thing.
The only exception to this privilege would be if an LLC’s operating agreement, other company documents, or state law forbids the action or the transfer of a certain percentage.
Can I Just Transfer My Interest?
An LLC member cannot just simply transfer their interest to another party. First, they must check that there are no provisions in the LLC’s operating agreement and/or other company documents concerning the transfer process.
If an agreement exists and it contains requirements to transfer interests in the LLC, then the selling member must strictly adhere to those procedures. They also should review state statutes for guidance on restricted transferability.
In some instances, a member may need to create a written agreement in order to transfer their interests, such as if it is mandated by an operating agreement or an LLC member wants to assign their financial benefits (as opposed to selling their ownership rights).
If no company documents specify whether an interest must be transferred through a written agreement, then this is when a member should consult state laws. Each state has its own regulations and requirements for transferring LLC interests, which means that these rules can vary considerably by state. Thus, while one state may invalidate a transfer that is not made through a written agreement, another might enforce it regardless of how it is done.
What if My LLC Operating Agreement Doesn’t Have a Section Address the Transfer of Interest?
In general, it is strongly recommended that members of an LLC form an operating agreement. An operating agreement is a business document that outlines the various membership duties and internal functions of an LLC. Operating agreements are not required to register an LLC, however, so not every LLC may have one in place.
As for the LLCs that do, they will be free to include any provisions that suit the needs of their particular business. Accordingly, operating agreements will vary by LLC. Furthermore, not all operating agreements will contain a section that addresses transferring the interests of an LLC.
If an LLC operating agreement does not provide instructions for how members can transfer their interest in the LLC, then the next item to look for is a buy-sell agreement. A buy-sell agreement may be a clause in the operating agreement or a separate contract. In the event that neither of these documents exist and there are no other rules regarding transfers of interest, then the members must defer to applicable state laws.
In addition, there are some other factors that can alter the transfer process. For instance, the reason why a member is transferring their interest (e.g., selling, gifting, assigning, etc.) and whether a transfer is being done voluntarily or involuntarily, can affect the process. Also, some types of transfers do not require the approval of other members, such as when an interest is transferred to someone within a member’s immediate family.
Lastly, the percentage of interest being transferred (e.g., partial or whole), the number of LLC member-owners, and whether the LLC or its members have a right of first refusal can impact this process as well. Members can also choose to amend the existing operating agreement or can create a separate buy-sell agreement with rules before a transfer occurs.
Will I Need the Approval of Other Members to Complete the Transfer?
As briefly mentioned above, whether an individual member needs the approval of the remaining LLC members will depend on the terms of an operating agreement or buy-sell clause. Again, if neither of these guidelines exist, then LLC members must review state law requirements.
Other factors that will affect whether a member can transfer their interest without having to consult the rest of the members include the person receiving the interest, whether members have a right of first refusal in the interest, and if the state laws governing the transfer process contain restrictions regarding transferability.
For example, a member who transfers their interest in an LLC to an immediate family member most likely will not need the approval of the other members. On the other hand, if an operating agreement grants its members a right of first refusal, then the selling member must present the option to purchase their interest to fellow members before they can proceed with the transaction. This is especially true when members are attempting to dissolve an LLC.
Do I Need to Talk to a Business Attorney about an LLC Transfer?
Transferring ownership interests in an LLC can be a fairly complicated process due to the complexity of the laws and procedures that must be complied with for a transaction to be valid. Thus, if you have any questions about an LLC transfer or need assistance with transferring your interests in an LLC, it may be in your best interest to consult a local corporate lawyer for further legal guidance.
An experienced business lawyer will be able to give you answers tailored to your specific issue and can identify which laws and contract provisions will apply to your transaction. Your lawyer can also review and explain the operating agreement along with the other LLC documents to ensure that you understand your rights.
In addition, your lawyer will be able to determine the risks and benefits associated with a particular transfer, can recommend alternative options if they believe a transaction is too risky, and can offer general business advice.
