Key Takeaways

  • An assignment of interest in an LLC transfers a member's economic rights, not management rights, unless the operating agreement or members permit otherwise.
  • The process requires detailed documentation, including a clear Membership Interest Assignment form.
  • States vary in how they treat assignor/assignee rights and liabilities—some even restrict member withdrawal or require member consent.
  • LLC operating agreements often limit assignment or require unanimous consent to convert an assignee into a full member.
  • Legal, financial, and tax implications of assignments—such as capital gains liability—should be evaluated.
  • Assignments are distinct from outright sales or abandonment of interest, each with unique legal consequences.

Assignment of interest in LLCs happens when a member communicates to other members his/her intention to transfer part or all of his ownership rights in the LLC to another entity. The assignment is usually done as a means for members to provide collateral for personal loans, settle debts, or leave the LLC. The member (assignor) and the person assigned (assignee) sign a document called the Membership Assignment of Interest.

Why a Member May Want to Assign Interest

A member may choose to assign interest for a number of reasons.

  • The assignment of interest may happen as collateral to a loan to one of the members.
  • Some members can assign interest to settle debts. The assignment will be effective until the debt is cleared.
  • An assignment of interest can also' be done to a member's legal heirs, going into effect upon the death of a member. 

The Rights and Limitations of the Assignee

The laws governing LLC membership interest assignments vary considerably from one state to another. 

  • Most states prohibit the assignee from participating in the LLC's operations or decisions unless the Articles of Organization have this provision.
  • An assignee is protected from liability from the assignor until the assignee becomes a member in most states. However, the law in a few states, including California and Florida, states that the assignee does get the assignor's liability.
  • Should the assignee become a member after the assignment, he is only entitled to the rights and restrictions the assignor had.
  • The assignment usually gives the assignee the right to receive the assignor's share of the profits — but not necessarily the other rights.

The Rights and Limitations of the Assignor

  • In many states, all LLC members have the right to assign membership interest.
  • In most states, assigning interest does not necessarily lead to forfeiting of voting and management rights and can be temporary. Texas law, on the other hand, states that the assignor ceases to be a member of the LLC after the assignment.

The Rights and Limitations of Other Members

  • All members of the LLC have to be notified of any type of assignment.
  • Some states require the assignment of interest to be approved by all members.
  • The new person who has been assigned interest does not necessarily become a member even if the assigner has decided to leave the LLC. The other members can decide whether to admit the assignee as a member or not. Should a member assign interest without the input of other members, the interest is normally limited to financial benefits.
  • In a two-member LLC, one member can easily transfer the interest to the other. 

The Membership Interest Assignment Document

The LLC's operating agreement should explain the rights of members on issues of transfer of interest, and the agreement should be followed during the assignment process. The Membership Interest Assignment acts as a record of the agreement, and the LLC normally keeps a copy of the document. The law in most states does not provide a formal template of the Membership Interest Assignment document but lists what should be included in the document. The document should have the following details:

  • Percentage of interest that will go to the assignee
  • Whether the assignee will have voting rights
  • The signatures of the assignor and the assignee

Key Elements to Include in an Assignment of Interest Agreement

An effective assignment of interest agreement should clearly define the scope and implications of the transfer. While LLC statutes don't always prescribe an exact format, the agreement should typically include:

  • Names and addresses of the assignor and assignee.
  • Date the assignment is to take effect.
  • The exact percentage of membership interest being assigned.
  • Provisions clarifying whether the assignee is entitled to receive distributions.
  • Clauses addressing liabilities, especially if the assignor’s obligations are also transferred.
  • A statement on whether the assignee is being admitted as a member or only receiving financial rights.
  • Governing law and dispute resolution terms.
  • Consent from other members, if required under the operating agreement.
  • Signatures of both parties and, if applicable, acknowledgment by a notary public.

Including these details not only helps prevent internal disputes but can also serve as proof of intent and agreement in any potential legal challenge.

Assignment of Interest Versus Selling Ownership Stake

The assignment of interest is typically different from selling the ownership stake. Selling a member's ownership stake in the LLC requires unanimous approval by the other members. A departing member may also assign his membership to another member.

If a member is being paid to transfer interest, this is treated for tax purposes as a sale, and the selling member's gains might be liable to capital gains tax. Even if a departing member is not paid for his interest, if the departure results in the assignee getting the departing members' share of liability, the departure is seen as an exchange or sale.

Assignment of Interest Versus Abandoning an LLC

If a member wants to withdraw interest in an LLC, he/she can choose to simply legally abandon the LLC in most states. The abandoning member should give some kind of notice to the other members explaining that he is abandoning membership. Abandoning membership does not usually require the approval of other members.

Abandoning an LLC does not absolve the member of liability he/she may have incurred when still a member.

Legal and Tax Considerations of Assignment of Interest

Before executing an assignment of interest, both the assignor and assignee should assess several legal and tax considerations:

  • Tax Implications: If consideration is exchanged, the IRS may treat the transaction as a taxable event. The assignor might owe capital gains tax depending on the appreciated value of the interest.
  • Transfer Restrictions: Many operating agreements or state laws prohibit assignment without the consent of all or majority members.
  • LLC Status: An assignment may trigger state filings or alter the LLC’s classification for tax purposes, especially in multi-member LLCs.
  • Creditor Claims: Assignments as collateral may open the assigned interest to creditor claims if not carefully structured.
  • Withdrawal Laws: Some states—like Delaware—prohibit members from withdrawing unless allowed in the operating agreement (Del. Code § 18-603).

Consulting with a legal or tax advisor can help avoid unintended consequences and ensure compliance with both internal and statutory rules.

When Assignments Are Prohibited or Limited

Assignments of interest may be legally restricted or procedurally complex due to:

  • Operating Agreement Provisions: Many agreements outright prohibit or place conditions on assignments to maintain member control and consistency.
  • State Law Restrictions: Certain states, including Delaware, require unanimous consent for assignments that transfer full membership rights.
  • Fiduciary Duty Considerations: Transferring an interest to a third party without member approval could breach fiduciary duties in closely held LLCs.
  • Bankruptcy or Dissolution Events: Assignments in these contexts may be void or heavily scrutinized to prevent fraud or improper distribution of assets.

These restrictions are designed to protect the integrity and operations of the LLC and ensure members retain control over who may gain financial or managerial interests.

Steps to Complete an Assignment of Interest

Assigning an interest in an LLC generally follows this process:

  1. Review the Operating Agreement: Confirm whether assignments are allowed and under what conditions.
  2. Obtain Consent from Members: If required, secure written approval or waiver from existing members.
  3. Draft the Assignment Agreement: Include key legal elements and clarify whether managerial rights are included.
  4. Update the LLC Records: Reflect the change in the company’s internal documentation and notify the registered agent or secretary if necessary.
  5. File Required State Documents: Some states require updates to member information on file with the Secretary of State.
  6. Notify the IRS (if applicable): If the LLC's tax classification changes, new forms (such as Form 8832) may be needed.

Each step must be executed carefully to ensure the transfer is legal, binding, and accurately recorded.

Frequently Asked Questions

  1. Does assigning an interest make the assignee a member of the LLC?
    No, an assignee typically only receives financial rights unless the other members approve them as a full member per the operating agreement.
  2. Can an assignment of interest be revoked?
    It depends on the agreement's terms. In some cases, assignments made as collateral can revert once a loan is repaid.
  3. What happens if the operating agreement is silent on assignments?
    State default laws apply. Most states allow financial assignments but not management rights without member consent.
  4. Is there a difference between assigning and selling LLC interest?
    Yes. Selling typically involves transferring full membership and control, while assignment usually transfers only economic rights.
  5. Can an LLC prevent a member from assigning interest?
    Yes. The operating agreement can restrict or outright prohibit assignment without member approval.

If you need help with the assignment of interest, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.