Assignment of interest takes place when a company is formed and the members or owners decide on the ownership percentages they will each hold. It also occurs when a member decides to leave the company and transfer their interest to another.

What Is an LLC?

An LLC, or limited liability company, is a business structure that offers liability protection to its members. The members of an LLC are essentially its owners, like the shareholders in a corporation. In the event of any financial or legal issues with the business, the members are protected from creditors taking any of their personal assets.

The interest percentages allotted to the LLC members are usually proportional to their capital contributions or their managerial responsibilities. This is also called their membership interest. LLC members who hold interest in the business are entitled to profit distribution as well as voting rights over company matters.

When members of an LLC retire or leave the business, they can assign their interest to another existing member or a new member. The LLC's operating agreement should outline how such a transfer should be handled. If there are no provisions for assignment of interest in the operating agreement, the state in which the LLC conducts business should have rules and regulations to follow instead.

LLC members tend to have more control over the daily operations of the business when compared to corporate shareholders. Usually, the members of an LLC are actually the individuals who started the business, so they have a strong desire to see the company succeed.

How Assigning Interest Works

LLC members assign interest when they need to hand their rights and responsibilities to the company over to another individual or business entity. One member's interest can be transferred to another in full or in part.

For instance, a retiring LLC member's interest in the business including all of the following aspects:

  • Voting rights
  • Managerial duties
  • Profit sharing

That member might choose to give their managerial duties to one person and their voting rights and profit shares to another. Basically, members reserve the right to assign their interest in any way they see fit, as far as the operating agreement allows.

Once the new member receives the interest, they inherit all of the rights and responsibilities that come with LLC membership that particular business, unless the operating agreement states otherwise.

Sometimes membership interest can be transferred, but the original member can hold onto their voting rights in the business, while the new member takes over the other rights and duties.

What Is an Assignment of Interest Agreement?

Assignment of interest agreements are the documentation for any transfer of interest in an LLC. In the contract, you should find the following information:

  • Name of original interest holder
  • Type of interest being transferred
  • Name of the individual or entity to receive the interest
  • Name of the LLC
  • Percentage of interest being assigned
  • Date of assignment
  • Other applicable terms and conditions

Once the assignment of interest agreement is signed by both parties, the giver of the interest and the receiver, the new holder of the membership interest agrees to follow the rules laid out in the various documents that govern the LLC. Such documents likely include the operating agreement and formation documents.

If the membership interest requires any initial or ongoing contributions to the business, the new interest holder is required to offer or continue such payments.

Aspects of Assignment of Interest to Keep in Mind

Depending on where the LLC is registered, the state might have specific laws regarding how assignment of interest is to be handled. Anytime major decisions or changes are happening in a business, it's always a good idea to double check the laws for the area.

Some states don't require the approval of LLC members for an assignment of interest, but they do limit the rights of the new member or receiver of the interest.

Operating agreements are the main governing power in such events, so an LLC might choose to forbid any interest assignments or transfers when they form the business. LLC members also reserve the right to lay out certain restrictions for interest assignments like the requirement of unanimous member approval.

The LLC's articles of organization may also include details regarding the assignment of membership interest.

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