1. What Is an LLC Membership Interest?
2. Proper Issuance of Membership Interests
3. Transfer of Membership Interests

Updated July 15, 2020:

An LLC membership interest refers to the ownership stake that a member holds in a limited liability company (LLC). An LLC is a popular business entity because it gives its owners liability protection and allows them to pay business income taxes at the individual level. While shareholders in a corporation own stock, an LLC's owners, also known as members, are assigned membership interests as an expression of their ownership stakes. A membership interest may be issued in the form of a percentage ownership interest or number of membership units.

What Is an LLC Membership Interest?

A membership interest represents a member's ownership stake in an LLC. A person who holds a membership interest has a profit and voting interest in the LLC. Ownership in an LLC can be expressed by percentage ownership interest or membership units. An LLC is different from a corporation in that it is able to distribute its membership interests in any way it wishes, regardless of the amount of capital contribution a member makes to the company. In addition, an LLC can have different classes of membership interests, which enables it to allocate profits and voting rights in a special manner.

Membership interests can be sold or transferred to other people or entities. The sale of membership interests must comply with federal and state securities laws. However, if you are dealing with less than 35 investors or advertising the sale, you will generally be exempt from most of the legal requirements. On the other hand, if you are planning to raise a large amount of money from many investors, it is advisable that you consult an attorney.

Proper Issuance of Membership Interests

In order to properly issue membership interests in your LLC, you need to do a number of things.

Operating Agreement

First of all, you should have a written and signed operating agreement that provides detailed information on the membership interests of your LLC. The membership interests can be expressed as percentages or units in the operating agreement. The agreement should also specify the consideration for the issuance of membership interests. While the consideration is typically cash, it can also be a transfer of assets, provision of services, or something else. The options depend on applicable state laws and your LLC's operating agreement.

Payment of Consideration

Secondly, you should have evidence that a certain member has paid the consideration specified in the operating agreement. If the payment is made in cash, you have to obtain a record of the amount deposited into your company's bank account. If the consideration is not cash, a written agreement should be made between the member and your LLC. It must be stated in the agreement that the member will pay, or is obligated to pay, the specified consideration.

Recordkeeping

Your LLC should also have a record book for holding important documents. The first documents you should include in the record book are the Articles of Organization and operating agreement. Then, you can add documents that pertain to membership interests, such as:

  • Membership transfer ledger
  • Membership certificates, if any
  • Balance sheet showing the capital account of each member

Transfer of Membership Interests

When a member of your LLC wishes to transfer the entirety of his or her membership interest to another person or entity, you have to create a document called Membership Interest Assignment. This document is usually used when a member is leaving the company or wants to entirely relinquish his or her interest. The need to use a Membership Interest Assignment normally occurs well after an LLC has been in operation.

An LLC can be formed and operate for any legal reason. You can form an LLC even if you are starting a small business. If you decide to relinquish your membership interest some day, you can assign it to another party by creating a Membership Interest Assignment.

An LLC Membership Interest Assignment is short and relatively easy to create. It contains all the information required for transferring membership interest to another party. Besides information pertaining to the transfer, this document also has places for the person transferring the membership interest, or the assignor, and the person who will be receiving the interest, or the assignee, to sign and execute the agreement.

If you need help assigning or transferring LLC membership 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.