Membership Transfer Agreements – Houston Law Firm
All the owners or members of an LLC usually have a percentage stake in the business, which is called the interest. This interest can be transferred to another person if he or she wants to leave the business. The interest can be transferred for financial or personal reasons. The transfer of interest is usually governed by the rules set out in the operating agreement. Here at RunRex.com, we would like to give you a bit more information on this transfer.
General Rules around Membership interest Transfer
Most LLC statutes will have a clear distinction between membership interests and membership rights. In most cases, the member’s transferable interest usually includes only the member’s share in the profits and losses and the right to participate in distributions. This is usually different from the right to participate in the management and control of the company. However, this does not always have to be the case. In most cases, a member’s financial interests are freely assigned as long as there are no restrictions in the operating agreement.
In most cases, an entity or individual that has been assigned member’s interest is not allowed to participate in management automatically. For this to happen, the owner of interest has to be admitted as a member of management via a unanimous consent of members or via another process that is detailed in the operating agreement.
If a member decides the transfer his or her interest in an LLC, that member has no membership in the LCC. He or she thereby relinquishes all power to exercise powers or rights that a member may have. Besides that, he or she will no longer be liable as a member of the LCC. However, if he does ever become an owner of interest again, he or she will still be liable. In most cases, once interest has been transferred, the new assignee will only have the financial rights of allocation of profit and losses until he or she is admitted as a member.
In most jurisdictions in the US, an LLC is allowed to create their unique rules for the transfer of member interests. In some cases, the LLC can enforce rules that restrict the transfer of interests. These restrictions can be enforced via various rules created by the LLC. However, members still have the right to exercise any veto power that they have under the operating agreement. This power must be exercised within the fiduciary duties that they have to other members with interest.
Thus, when the exercise of veto power leads to a breach of the member’s fiduciary duties, that member may be held liable for any damage resulting from such actions. Besides voting and management right, most LLC statutes have rules that deny assignees right to information and to compel the LCC’s dissolution. The rules for assignees of interest are clearly spelled out to avoid disputes or confusion.
The Right of First Refusal
This right usually provides for the LLC to be given the first offer if a member wishes to transfer their interest. Even when the member has received a significant offer from a third party, they must make the offer to the LLC first. This offer must be on identical terms and conditions with that of the third party.
In most cases, the other members are usually given a grace period during which to determine if, they will exercise the right of first refusal. If the time lapses without the remaining members taking action, the third party may go ahead and make a purchase.
The operating agreement may also contain a put provision. This put provision states that a member can only sell membership interest after irreconcilable differences occur within the LLC. This usually means that the member wants out but is unable to find a willing buyer but wishes to sell their interest to the other member.
It may also mean that the member wants to purchase the interest of the other members. This provision is usually important when the members cannot reach an agreement about the future of the ownership of the LLC.
Admittance of a New Member
The general rule on the admittance of a new member is that all members must consent. However, it does not always have to be the case. In most cases, the operating agreement will contain clear rules in interest transfer and the addition of new members. It is important that an LLC have clear rules on the role that existing members have in the addition of new members. This rule is important for the members so that they are protected from having to manage the company with an unfamiliar new member, who may not understand the company.
Summary
If you are thinking of setting up an LLC, it is always advisable to have a lawyer present. Using an online template could lead to serious issues later. Besides that, you need to have someone with you who is conversant with the LLC rules of your specific locality.