Transferring LLC Membership Interests Part 1 — An Overview

August 14, 2019 by

LLC AgreementIf you are a member of a limited liability company (LLC) or believe you may become a member of an LLC, or you just wonder how flexible an LLC may be with ownership, please read on. This article applies to an LLC formed under Florida law; however, the topic and its importance apply to LLCs formed under any state’s law. This article is the first of a three-part series of articles about transferring an LLC membership interest.

Consider for discussion you are, or will become, the owner of a membership interest in an LLC. You think there is an agreement about members’ rights and responsibilities, but you are not sure. What do you do?

The best place to start when you have a question about transferring your LLC membership interest is the LLC’s operating agreement. You ask questions and look for answers in the LLC’s operating agreement. You ask: What if you want to leave the LLC? What if you get a divorce? What if you have creditors seeking immediate repayment? What can you do with your LLC membership interest? That answer depends on how transferable those membership interests are. Transferring an LLC membership interest can mean selling, donating, assigning, or gifting. Basically, one LLC member turning over his or her membership interests to another individual or legal entity. That transfer can be voluntary or involuntary.

Examples of voluntary transfers: Selling your membership interest to a third party or to the remaining members, donating your membership interest to a charity, or leaving membership interests to a trust upon your death.

Examples of involuntary transfers: Those prompted by divorce, bankruptcy, and termination of employment.

The transferability of an LLC membership interest is subject to competing interests. On the one hand, freely transferable membership interests can be more attractive to members because they are easier to dispose of or cash out. The membership interests are more liquid and marketable. But LLC members usually want to maintain the right to "pick their partners." If membership interests are freely transferable, the remaining members have no control over who comes in as a business partner when a member transfers their membership interests.

Restricted transferability places limits on transfers and the status of the recipient. Are membership interests freely transferable or restricted? The LLC members decide. The good news about forming an LLC is the flexibility of its structure. The founding members may adopt transferability provisions in the operating agreement or have a separate buy-sell agreement.

If your operating agreement does not address transferability and you do not address the transferability of LLC membership interests in a buy-sell agreement, the LLC members have relinquished control and subjected themselves and the LLC to the Florida law default provisions for LLCs.

Although planning for a member’s departure from the LLC when you are just forming it may be difficult, if you are not thinking through all the possible exit scenarios, you are not planning for them. If your LLC is already up and running and you do not have transferability provisions documented, the members may create or amend the operating agreement or adopt a buy-sell agreement. Look to the existing operating agreement, if any, for directions on how to amend it.

How are membership interest transfers restricted? While membership interests may be freely transferable in the sense that any member generally may transfer his or her economic rights in the LLC (subject to the operating agreement, a stand - alone buy-sell agreement, and Florida law), the management or voting rights in the LLC are usually what are restricted, otherwise the members would be forced to become "partners" with someone not of their choosing.

It is not unusual for an LLC’s operating agreement to provide that a recipient of a restricted membership interest may receive economic and management rights only with unanimous consent of the members.

In Part 2 and Part 3 in this series, voluntary and involuntary transfers of LLC interests will be further discussed.

If you would like to discuss your LLC membership or transfer of membership with one of our business attorneys, please contact us at 813-852-6500.