Purchasing a Membership Interest in an LLC
Limited Liability Companies are frequently organized by many smaller and larger businesses. This is usually because limited liability companies may require less structure than a corporation, and can offer a similar amount of protection as other corporate entities. However, it is generally more difficult to transfer a membership interest in a limited liability company than it is to transfer an interest in a corporation, which can be an advantage or a disadvantage depending on the situation. However, transferring a membership interest in a limited liability company is possible in a number of circumstances.
Operating Agreements
The first thing to consider when transferring a membership interest in an LLC is the operating agreement of the limited liability company. The operating agreement is the document that governs all of the operations of the company and is similar to a partnership agreement or shareholder agreement that are associated with other corporate forms. Operating agreements often touch upon a range of subjects, including the powers of members and managers of the company, how revenue will be distributed, and how a company will wind down its affairs upon dissolution.
Transferring a membership interest in an LLC is easier if the operating agreement has provisions that discuss how a member can transfer their ownership in the business. Some operating agreements make it very difficult or almost impossible for members to transfer their interest in a company. Certain businesses wish to make it difficult for owners to leave the company and do not wish to associate with different people in order to run a business. However, some operating agreements make it easy for members to transfer their membership interest in a company. Of course, it makes sense to have an experienced lawyer draft the operating agreement so that all circumstances can be considered. In any case, it often makes sense to follow the procedures found in a company’s operating agreement if possible so that transferring a membership interest in an LLC can be as easy as possible.
Membership Transfer of Interest Agreement
The main document associated with transferring a membership interest in an LLC is the membership transfer of interest agreement. The transfer of interest agreement lays out all of the promises and representations associated with transferring a membership interest in a limited liability company. The document specifies the price for which the membership interest will be sold and may include details about how the closing process for the transaction will take place. The document also includes all of the agreements that are necessary in order to effectuate the membership interest transfer.
Moreover, the agreement usually includes representations by both parties to an agreement, such as how everyone is authorized to effectuate the transfer and that all due diligence documents are accurate. In addition, the document may include a confidentiality stipulation, non-solicitation provision, or a non-compete depending on the situation for which the membership interest is being transferred. These agreements also contain “boilerplate” language, such as indemnification agreements, choice of law provisions, a set jurisdiction for any claims that may arise under the agreement, and other verbiage.
How the membership transfer agreement is structured largely depends on provisions in the operating agreement. For instance, if the operating agreement only requires the permission of the transferor to transfer the membership interest, the only parties to the agreement may be the transferor and the transferee. However, if the operating agreement requires that all of the members of the limited liability company approve of the transaction, or a majority of the members, then those members will also likely need to be parties to the agreement. Even if you only need the approval of one or several of the members of a limited liability company, it is usually best to have all of the members on board when transferring a membership interest in the LLC sign off on the membership transfer agreement. This is because operating agreements can usually be amended with unanimous consent, and an experienced attorney should be able to discuss how the transfer agreement should be structured.
Bill of Sale
Another important document when transferring a membership interest in an LLC is the bill of sale. A bill of sale is just a separate memorialization of the fact that the transfer transaction has been consummated, and it can be thought of like a traditional stock certificate for other corporate forms. The bill of sale usually references the transfer agreement and notes that the membership interest has been transferred and usually states the amount of money that was paid for the membership agreement. Having the bill of sale may be important to show to tax professionals, when further transferring a membership interest, and for a number of other purposes. Typically, a bill of sale is included as an exhibit to a transfer agreement so that the parties are clear about the form the bill of sale will take when it is executed to consummate a transaction, and it is important that the bill of sale and any other documents be kept in a secure place to evidence the transaction.
The Rothman Law Firm has extensive experience with transferring a membership interest in an LLC and dealing with other corporate transactions and issues. If you are looking for an experienced corporate lawyer to handle your transfer of membership transaction or other corporate issue, please feel free to contact The Rothman Law Firm to request a free consultation.