LLC Membership Units: Everything You Need to Know
LLC membership units refer to a form of membership interests issued to a person or entity that made a capital contribution to a limited liability company (LLC). 3 min read
2. Issuing Membership Interests
3. Adding New Membership Units
Updated June 28, 2020:
LLC membership units refer to a form of membership interests issued to a person or entity that made a capital contribution to a limited liability company (LLC). These units represent the party's ownership stake in the company. The holder of membership units, also known as a member, is entitled to a share of the LLC's profits and has the right to vote on major decisions. An LLC may assign membership units as it pleases and allow its members to sell or transfer their units.
Understanding Ownership Interests in an LLC
In an LLC, ownership may be expressed as percentage ownership interests or membership units. An LLC's membership units are similar to a corporation's shares of stock. Regardless of the way it is expressed, ownership gives members voting rights and a share of the company's profits. An LLC differs from a corporation in that it has the freedom to assign its ownership interests any which way it chooses, without regard for the amount of money, asset, or property a member has contributed to the company.
Also, an LLC is allowed to have different classes of membership interests, giving it the flexibility to distribute voting rights and profits in special ways. Members are allowed to sell their membership interests, but they have to comply with federal and state securities laws. However, if they are seeking funding from less than 35 investors and not advertising the sale of their membership interests, they are generally not subject to most of the regulations. For those who are planning to raise substantial funds from more than 35 investors, it is a good idea to seek the advice of an attorney.
Issuing Membership Interests
If you form an LLC without the assistance of an attorney, there is a good chance that you will not issue membership interests properly.
In order to issue membership interests correctly, the first thing you need to do is create and sign an operating agreement. This agreement should specify the membership interests of your LLC and whether they are expressed as ownership percentages or membership units. In addition, it should state the type of consideration that will be paid for the membership interests. While the consideration is typically cash, it can also come in the form of provision of services or transfer of assets. The choices available are dependent on state laws and the operating agreement.
It is also important that you have evidence confirming that payment of the specified consideration has been made. If a member chooses to pay in cash, you should have a record showing that the specified amount has been deposited into the bank account of your LLC. As for non-cash consideration, you need to establish a written agreement between your LLC and the member to legally obligate the member to pay the specified consideration.
Lastly, your LLC should create and maintain a record book for keeping important documents such as the Articles of Organization and the operating agreement. The record book should also contain documents related to the membership interests of your LLC, including:
- Membership transfer ledger
- Membership certificates, if you choose to issue them
- Balance sheet showing every member's capital account
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.
If you need help creating, assigning, or transferring LLC membership units, 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.