Assignment of Interest In LLC: Everything You Need to Know
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. 3 min read
2. The Rights and Limitations of the Assignee
3. The Rights and Limitations of the Assignor
4. The Rights and Limitations of Other Members
5. The Membership Interest Assignment Document
6. Assignment of Interest Versus Selling Ownership Stake
7. Assignment of Interest Versus Abandoning an LLC
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 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
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.
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