1. What Is an LLC Membership Certificate?
2. Limited Liability Company Benefits
3. Writing a Membership Certificate
4. The Basics
5. Signatures
6. Transfer Rights
7. Three Types of LLC Certificates
8. What's Included in a Member Certificate?
9. Keeping a Certificate Ledger
10. Assignment Form on Certificate
11. Lost Certificates
12. Certificate of Good Standing
13. LLC Requirements
14. Adding New Membership Units
15. How to Start Your LLC

Updated July 6, 2020:

What Is an LLC Membership Certificate?

Similar to corporation stock shares, certificates are issued to each LLC member to specify each member's claim in the organization. The Membership Certificate is an essential record for registers and corporate ledgers that also increases an organization's reputation. Membership Certificates help the organization structure its ownership, taxation, and profits. Each certificate is signed by the LLC's secretary, whose signature is often accompanied by the signature of a witness or secondary officer.

“LLC” stands for limited liability company, which is a flexible business structure requiring a certificate of organization. Owners are referred to as members. The LLC itself is responsible for issuing Membership Certificates, considering the origination state, the number of issued units, and the members receiving the document. When there are any changes in an LLC ownership, new certificates may be issued and old certificates relinquished.

It's important to limit the number of membership units and allocate those memberships based on each individual's interests in the business. Include a section in your LLC's Operating Agreement that describes the certificates and the roles they play in the LLC. The Operating Agreement should also list the names of authorized members who can sign on behalf of the business.

Members should receive an original certificate as proof of ownership, but the LLC should retain copies of every member certificate as part of its records. While you don't need to file your Membership Certificates with the Secretary of State, you should report any key officer changes in your annual report filings. Make sure that all certificates are kept up-to-date to prevent disputes with the LLC's ownership.

Limited Liability Company Benefits

Some of the benefits of an LLC include:

  • Personal limited liability protection.
  • Flexibility in how the business is managed.
  • Pass-through taxation.
  • Meeting minutes are not required.
  • Members do not need to be U.S. citizens or permanent residents.
  • The ability to easily add investors without impacting the overall business structure.

Writing a Membership Certificate

Although you are not legally required to issue Membership Certificates, it is advisable that you do so if your LLC has members who are inactive, wish to transfer their ownership interests to other parties, or cannot easily access your company's business records.

The Basics

An LLC Membership Certificate should include statements such as "NAME OF MEMBER is entitled to XX percent ownership interest in NAME OF COMPANY, a limited liability in NAME OF STATE." In addition, you need to state in the certificate that the rights of the members are described in your LLC's Articles of Organization and operating agreement.

Signatures

Since Membership Certificates are not legally required and enforceable, the rules for signing these documents can vary from one LLC to another. While some LLCs just leave the task of signing a Membership Certificate in the hands of an authorized manager, others have a more formal signing process that requires the signatures of the recipient of the certificate, an authorized agent, and a witness.

Transfer Rights

If an LLC decides to issue Membership Certificates, it has to create a legend that provides an accurate description of the transfer rights. If there is not enough space on the certificate, you can add the legend to the reverse side.

When a membership interest is transferred to another person or entity, the legend serves to notify the party that certain restrictions apply. Typically, a legend contains a statement saying that the interests are not registered under federal or state securities law. In addition, it may include information regarding applicable contractual restrictions, such as restrictions imposed on transfers and sales by your LLC's operating agreement.

Three Types of LLC Certificates

There are three types of LLC certificates you will need when establishing your LLC business:

  1. Certificate of Organization
  2. Member Certificates
  3. Certificates of Good Standing

The Certificate of Organization states the name of the business, the date it was established, its address, and the address of at least one member. Certain states don't require an LLC to have a Certificate of Organization. Instead, they may require you to file Articles of Organization, which is effectively the same thing. Keep your Certificate of Organization in your LLC's creation documents along with member information, annual filings, and certificates of good standing.

An LLC will receive a Certificate of Good Standing once the annual report has been completed and all fees are paid to the state. The Certificate of Good Standing is an important document for lenders, banks, vendors, and investors because it proves the business complies with state regulations. An LLC without a Certificate of Good Standing may have a difficult time finding partners or anyone willing to do business with the company.

What's Included in a Member Certificate?

Member Certificates tend to include the following information:

  • Issue date
  • Certificate number
  • Member name
  • Company name
  • Date and state of the LLC's formation
  • The member's investment
  • Membership interests, including the percentage of interest in the business
  • Number of members
  • A statement of benefits or rights
  • A disclaimer that states the member's interests may not be transferable
  • Authorized member signatures

Keeping a Certificate Ledger

Certain states require businesses to keep a ledger for every certificate issued. This ledger should be included in your LLC's record books. Consider making photocopies to have on hand. You can buy blank certificate paper to print your certificates or download a free certificate template to make it easier. Look for a temple that features a bill of sale portion for including the date, sale amount, new owner, and appropriate signatures in the event a member wishes to sell his or her ownership share.

Assignment Form on Certificate

Membership interests can be assigned when allowed by both your LLC operating agreement and the state laws. If your membership interests can be assigned to another person or business, print a blank assignment form on the other side of the Membership Certificate. Like an automobile title transfer form, the owner can use this to assign his or her ownership interest to another business or entity in accordance with the LLC operating agreement.

Lost Certificates

A member should protect the Membership Certificate as he or she would a securities certificate or stock. If the certificate is lost, the member must sign a statement verifying it has not been sold or transferred before the LLC reissues a new certificate. The member should also sign an indemnity agreement releasing the LLC from liability issues related to issuing a new certificate.

Certificate of Good Standing

The Certificate of Good Standing serves as proof that the LLC has fulfilled state requirements, such as:

  • Annual reporting
  • Fees
  • Franchise taxes

It shows that the LLC is currently cleared to conduct state business. You may be asked to present your certificate of good standing to investors, lenders, vendors, and banks. Not having this certificate may dissuade them from working with you.

LLC Requirements

When establishing an LLC, make sure to choose a name that distinguishes your business from others in the state. It must end with the words "Limited Liability Company" or "LLC." An attorney can help you determine whether your desired name fits state requirements. Your LLC should also have a registered business address in your state.

Adding New Membership Units

Your LLC can bring in new members, but you have to make sure that the expansion is financially beneficial to the existing members even though the financial pie is divided into more pieces. In order to add new members to your LLC, you need to have a unanimous affirmative vote from all existing members. This is necessary because the addition of new members will dilute the ownership stakes of the current members. Any member has the right to stop the addition of new members and prevent ownership from being divided further. This means that additional members can only win approval if they are clearly beneficial to all existing members.

As opposed to diluting ownership stakes, adding a new member to your LLC through the issuance of new membership units can have a positive impact on your LLC and existing members. For instance, if your LLC provides accounting services, it is a good idea to bring on a new owner with expertise and a client list. All existing members will benefit from a larger company with more customers.

How to Start Your LLC

  1. Select a name
    • Taking time on the front-end to research a name will pay dividends in the long-run. Ensure that your LLC's name is well-suited for your business and is easily searchable online.
  2. Select a Registered Agent
    • It is required that all LLCs or corporations nominate a registered agent. A registered agent is responsible for sending and receiving legal papers on behalf of the LLC.
  3. Articles of Organization
    • Your business will officially become an LLC after filing the Articles of Organization. Typical requirements include:
      • Name of the LLC
      • Principal place of business
      • Management type
  4. Employer Identification Number (EIN)
    • The IRS requests that all businesses that operate as a partnership or corporation or have employees should have an EIN. This nine-digit number identifies your business for tax purposes.
  5. Operating Agreement
    • An Operating Agreement is not required by many states and may be either oral or written. The Operating Agreement should address the:
      • Management structure
      • Details regarding the ownership allocation
      • Member voting rights
      • Duties and powers of managers and members
      • Process for distributing profits or losses
  6. Open a business bank account
    • It's important to separate your personal affairs from your business affairs. Open a bank account for your business that is not associated with your personal account. If a lawsuit were filed, being able to clearly identify personal finances versus business funds is advantageous.

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