Selling Limited Liability Company Membership Interests

There are several important issues to consider when buying or selling Limited Liability Company membership interests.

There are usually provisions in operating agreements that address the process involved in transferring a member’s interest. What type of provisions? For starters, they require the member to provide notice of the transfer to the other members. In addition, many operating agreements include a right of first refusal. This right gives the company the option to buy back the membership interests on the same terms as those of the proposed sale to a third party. Many LLC operating agreements contain restrictions that only permit a sale with unanimous consent of all the company’s members.

The tax issues involved when selling limited liability membership interests and admitting new partners into the LLC can be tricky. It is best practice to discuss the specifics of the transfer with your accountant. Selling LLC membership interests is much more complex that a sale of stock in a corporation.  While the majority of LLCs are taxed as partnerships, many are classified as corporations. Transfer of interests should be structured differently depending on the tax classification.

There will be other important factors for you to consider when selling Limited Liability Company membership interests. Operating Agreements include non-solicitation and non-competition clauses that the outgoing member must be mindful of. The transfer must also be compliant with securities laws. If the venture is particularly risky, the buyer should be sophisticated and be able to verify that the funds invested are discretionary.

Sometimes, when everything is taken into account, it may not be wise to sell the LLC interests and the parties want to consider a creative solution such as a profit participation agreement. This gives an investor the right to the monetary distributions due an LLC member. Many times this can be done without triggering many of the above restrictions involved in a transfer.

Always consult an experienced attorney when selling Limited Liability Company membership interests.