Transfer of Membership Interest in LLC: Everything to Know
The transfer of membership interest in LLC entities is done through an LLC Membership Interest Assignment.3 min read
The transfer of membership interest in LLC entities is done through an LLC Membership Interest Assignment. This document is used when an owner (member) of an LLC wants to transfer their interest to another party. They are typically used when a member plans to leave or wants to relinquish their interest in the business.
This is a short, somewhat easy document to create. It contains places for both the person transferring the interest (Assignor) and the person receiving the interest (Assignee) to complete the document. It includes details on both parties, as well as the membership interest. You will include the membership percentage, whether it comes with voting rights or not, and there is an addendum that handles consent of all LLC members if required.
LLC Membership Interest Assignments fall under individual state laws because LLCs are managed by individual state regulations, not federal law. You may hear this form referred to by several other names:
- LLC Interest Assignment Agreement
- Interest Assignment for LLC Membership
- Assignment of Interest for LLC
- Membership Assignment for LLC
- Member Interest Transfer for LLC
Transfer of Interest in Delaware LLCs
Changes are inevitable in business, and LLCs are no different. If you happen to have set up your LLC in Delaware, it's quick and easy to transfer membership interests without expensive amendments. The Delaware LLC Operating Agreement details all conditions of future sales and/or transfers. It's typically handled internally with amendments and there is no need to record the change of interest with the state's Division of Corporations.
Transferring LLC Ownership
There are a number of reasons ownership may change. Some of these include:
- Desire to bring in new members
- A member passes away, gets divorced, or becomes disabled
- Someone wants to leave the LLC
- You want to sell the entire business
The procedure to transfer ownership is dictated by whether you are transferring only a portion or the whole LLC. Are you only bringing on a new member and therefore only need to change name and ownership percentages? Each member owns a percentage of the business, and if you want to add someone new, you will need to transfer some of the existing membership interests. If you have an Operating Agreement, it should provide details on how business transfers are to be handled.
It's important to have buy-sell, or buyout, provisions in your Operating Agreement, which detail how ownership changes work, as agreed upon by all members. Buy-sell provisions detail the method of how to value the business and membership interests, and it might place restrictions on who can become a member or the requirement to buy back interests from a member who is departing. If you don't have an Operating Agreement, or you have one but it doesn't contain buy-sell provisions, you'll need to look at your respective state statutes on how membership transfers are to be handled.
If your current Operating Agreement is lacking, it's a good idea to amend it or complete a new one. You may need to in order to document the ownership changes. If you don't need a new agreement, you at least need an amendment that lists any new members and their interest percentages.
Selling the LLC to a Third Party
Buy-sell provisions in an Operating Agreement don't cover selling the business to a third-party. To sell the business, you need to find a buyer and agree on the selling price. You may need the services of an experienced business valuation expert and/or have the buyer examine your books. There may be complex financial implications connected with the sale. It's recommended you consult with an attorney who is well-versed in buying and selling LLCs.
Abandoning LLC Membership Interests
One method of getting rid of your LLC interest is to just abandon it, if that is allowed under state and the specific LLC's Operating Agreement. To establish abandonment, the person giving up the interest must provide notice to the LLC and other members that they are abandoning their membership rights and interests. This does not require the consent of remaining members. However, it does not eliminate any personal liability the member had to third parties prior to the abandonment.
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