florida assignment of llc membership interest

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LLC Membership Interest Assignment

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An LLC Membership Interest Assignment is a document used when one member of an LLC, also known as a limited liability company, wishes to transfer their interest to another party entirely. LLC Membership Interest Assignments are often used where a member in an LLC is leaving or otherwise wants to relinquish the entirety of their interest in the company.

An LLC Membership Interest Assignment normally happens well after the LLC has already been operating . To form a limited liability company in most states, any party must begin with Articles of Organization (sometimes called Certificates of Formation or other varying names). These documents will get the LLC formed and in compliance with state laws.

A limited liability company can operate and be formed for any reason (except illegal ones). For example, even if it is a small business, like dog-walking, the owners might want to have an LLC to protect themselves. If so, and if any owner decided to one day relinquish their interest in the LLC , that owner could use this LLC Membership Interest Assignment to assign it to another person.

LLC Membership Interest Assignments are short, relatively easy documents which contain all the information needed to transfer an interest in an LLC.They contain a place for both the person transferring the interest (called the Assignor) and the person receiving the interest (called the Assignee) to execute the document.

How to use this document

This document can be used when any party would like to transfer the ownership of an interest in an LLC or when any party would like a membership interest in an LLC transferred to them, as long as the current owner of the membership interest agrees. It should be used it when both parties understand that the membership interest will be completely assigned and wish to create a record of their agreement, as well as a document that the LLC will likely keep on file.

This document will allow the form-filler to input details of the identities of both parties, as well as the details of the membership interest, such as percentage and whether or not it comes with voting rights . It also has an optional addendum at the end, in case full consent is needed from all the rest of the members of the LLC .

Please keep in mind that this form requires both signatures , from the party assigning the interest and the party receiving it.

Applicable law

LLC Membership Interest Assignments are subject to the laws of individual states . There is no one federal law covering these documents, because each individual state governs the businesses formed within that state.

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You fill out a form. The document is created before your eyes as you respond to the questions.

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Guides to help you

• How to Sell your Percentage in an LLC
• How to Sell your Business
• How to Transfer Business Ownership

Other names for the document:

Assignment of Interest for LLC Member, Interest Assignment for LLC Membership, LLC Interest Assignment Agreement, Member Interest Transfer for LLC, Membership Assignment for LLC

Country: United States

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Assignment of Membership Interest: The Ultimate Guide for Your LLC

LegalGPS : November 30, 2023 at 8:16 AM

As a business owner, there may come a time when you need to transfer ownership of your company or acquire additional members. In these situations, an assignment of membership interest is a critical step in the process. This blog post aims to provide you with a comprehensive guide on everything you need to know about the assignment of membership interest and how to navigate the procedure efficiently. So, let's dive into the world of LLC membership interest transfers and learn how to secure your business!

What is an Assignment of Membership Interest?

An assignment of membership interest is a document that allows a member of an LLC to transfer their ownership share in the company to another person or entity. This can be done in the form of a sale or gift, which are two different scenarios that generally require different types of paperwork. An assignment is typically signed by the parties involved and delivered to the Secretary of State's office for filing. However, this process can vary depending on where you live and whether your LLC has members other than yourself as well as additional documents required by state law.

Necessary Approvals and Consent

Before initiating the assignment process, it's essential to review the operating agreement of your LLC, as it may contain specific guidelines on how to assign membership interests.

Often, these agreements require the express consent of the other LLC members before any assignment can take place. To avoid any potential disputes down the line, always seek the required approvals before moving forward with the assignment process.

Impact on Ownership, Voting, and Profit Rights

It's essential to understand that assigning membership interests can affect various aspects of the LLC, including ownership, voting rights, and profit distribution. A complete assignment transfers all ownership rights and obligations to the new member, effectively removing the original member from the LLC. For example, if a member assigns his or her interest, the new member inherits all ownership rights and obligations associated with that interest. This includes any contractual obligations that may be attached to the membership interest (e.g., a mortgage). If there is no assignment of interests clause in your operating agreement, then you will need to get approval from all other members for an assignment to take place.

On the other hand, a partial assignment permits the original member to retain some ownership rights while transferring a portion of their interest to another party. To avoid unintended consequences, it's crucial to clearly define the rights and responsibilities of each party during the assignment process.

Types of Membership Interest Transfers

Membership interest transfers can be either complete or partial, depending on the desired outcome. Understanding the differences between these two types of transfers is crucial in making informed decisions about your LLC.

Complete Assignment

A complete assignment occurs when a member transfers their entire interest in the LLC to another party, effectively relinquishing all ownership rights and obligations. This type of transfer is often used when a member exits the business or when a new individual or entity acquires the LLC.

For example, a member may sell their interest to another party that is interested in purchasing their share of the business. Complete assignment is also used when an individual or entity wants to purchase all of the interests in an LLC. In this case, the seller must receive unanimous approval from the other members before they can transfer their entire interest.

Partial Assignment

Unlike a complete assignment, a partial assignment involves transferring only a portion of a member's interest to another party. This type of assignment enables the member to retain some ownership in the business, sharing rights, and responsibilities proportionately with the new assignee. Partial assignments are often used when adding new members to an LLC or when existing members need to redistribute their interests.

A common real-world example is when a member receives an offer from another company to purchase their interest in the LLC. They might want to keep some ownership so that they can continue to receive profits from the business, but they also may want out of some of the responsibilities. By transferring only a partial interest in their membership share, both parties can benefit: The seller receives a lump sum payment for their share of the LLC and is no longer liable for certain financial obligations or other tasks.

How to Draft an Assignment of Membership Interest Agreement

A well-drafted assignment of membership interest agreement can help ensure a smooth and legally compliant transfer process. Here is a breakdown of the key elements to include in your agreement, followed by a step-by-step guide on drafting the document.

Key elements to include:

The names of the assignor (the person transferring their interest) and assignee (the person receiving the interest)

The name of your LLC and the state where it was formed

A description of the membership interest being transferred (percentage, rights, and obligations)

Any required approvals or consents from other LLC members

Effective date of the assignment

Signatures of all parties involved, including any relevant witnesses or notary public

Step 1: Gather Relevant Information

Before you begin drafting the agreement, gather all pertinent data about the parties involved and the membership interest being transferred. You'll need information such as:

The names and contact information of the assignor (the person transferring their interest) and assignee (the person receiving the interest)

The name and formation details of your LLC, including the state where it was registered

The percentage and value of the membership interest being transferred

Any specific rights and obligations associated with the membership interest

Step 2: Review the LLC's Operating Agreement

Examine your LLC's operating agreement to ensure you adhere to any predetermined guidelines on assigning membership interests. The operating agreement may outline specific procedures, required approvals, or additional documentation necessary to complete the assignment process.

If your LLC doesn't have an operating agreement or if it's silent on this matter, follow your state's default LLC rules and regulations.

Step 3: Obtain Necessary Approvals and Consents

Before drafting the assignment agreement, obtain any necessary approvals or consents from other LLC members as required by the operating agreement or state law. You may need to hold a members' meeting to discuss the proposed assignment and document members' consent in the form of a written resolution.

Step 4: Outline the Membership Interest Being Transferred

Detail the membership interest being transferred in the Assignment of Membership Interest Agreement. Specify whether the transfer is complete or partial, and include:

The percentage of ownership interest being assigned

Allocated profits and losses, if applicable

Voting rights associated with the transferred interest

The assignor's rights and obligations that are being transferred and retained

Any capital contribution requirements

Step 5: Determine the Effective Date of the Assignment

Set an effective date for the assignment, which is when the rights and obligations associated with the membership interest will transfer from the assignor to the assignee.

This date is crucial for legal and tax purposes and helps both parties plan for the transition. If you don’t specify an effective date in the assignment agreement, your state's law may determine when the transfer takes effect.

Step 6: Specify Conditions and Representations

In the agreement, outline any conditions that must be met before the assignment becomes effective. These could include obtaining certain regulatory approvals, fulfilling specific obligations, or making required capital contributions.

Additionally, you may include representations from the assignor attesting that they have the legal authority to execute the assignment. Doing this is important because it can prevent a third party from challenging the assignment on grounds of lack of authority. If the assignor is an LLC or corporation, be sure to specify that it must be in good standing with all necessary state and federal regulatory agencies.

Step 7: Address Tax and Liability Issues

Clearly state that the assignee will assume responsibility for any taxes, liabilities, and obligations attributable to the membership interest being transferred from the effective date of the assignment. You may also include indemnification provisions that protect each party from any potential claims arising from the other party's actions.

For example, you can include a provision that provides the assignor with protection against any claims arising from the transfer of membership interests. This is especially important if your LLC has been sued by a member, visitor, or third party while it was operating under its current management structure.

Step 8: Draft the Entire Agreement and Governing Law Clauses

In the closing sections of the assignment agreement, include clauses stating that the agreement represents the entire understanding between the parties concerning the assignment and supersedes any previous agreements or negotiations. Specify that any modifications to the agreement must be made in writing and signed by both parties. Finally, identify the governing law that will apply to the agreement, which is generally the state law where your LLC is registered.

This would look like this:

Step 9: Review and Sign the Assignment Agreement

Once you've drafted the Assignment of Membership Interest Agreement, ensure that all parties carefully review the document to verify its accuracy and completeness. Request a legal review by an attorney, if necessary. Gather the assignor, assignee, and any necessary witnesses or notary public to sign the agreement, making it legally binding.

Sometimes the assignor and assignee will sign the document at different times. If this is the case, then you should specify when each party must sign in your Assignment Agreement.

Importance of a Professionally-drafted Contract Template

To ensure a smooth and error-free assignment process, it's highly recommended to use a professionally-drafted contract template. While DIY options might seem tempting, utilizing an expertly-crafted template provides several distinct advantages.

Advantages of using a professionally-created template:

Accuracy and Compliance: Professionally-drafted templates are designed with state-specific regulations in mind, ensuring that your agreement complies with all necessary legal requirements.

Time and Cost Savings: With a pre-written template, you save valuable time and resources that can be better spent growing your business.

Reduced Legal Risk: Legal templates created by experienced professionals significantly reduce the likelihood of errors and omissions that could lead to disputes or litigations down the road.

How our contract templates stand out from the rest:

We understand the unique needs of entrepreneurs and business owners. Our contract templates are designed to provide a straightforward, user-friendly experience that empowers you with the knowledge and tools you need to navigate complex legal processes with ease. By choosing our Assignment of Membership Interest Agreement template, you can rest assured that your business is in safe hands. Click here to get started!

Frequently Asked Questions (FAQs) about Assignment of Membership Interest

As you embark on the journey of assigning membership interest in your LLC, here are some frequently asked questions to help address any concerns you may have:

Is an assignment of membership interest the same as a sale of an LLC? No. While both processes involve transferring interests or assets, a sale of an LLC typically entails the sale of the entire business, whereas an assignment of membership interest relates to the transfer of some or all membership interests between parties.

Do I need an attorney to help draft my assignment of membership interest agreement? While not mandatory, seeking legal advice ensures that your agreement complies with all relevant regulations, minimizing potential legal risks. If you prefer a more cost-effective solution, consider using a professionally-drafted contract template like the ones we offer at [Your Company Name].

Can I assign my membership interest without the approval of other LLC members? This depends on your LLC's operating agreement and state laws. It's essential to review these regulations and obtain any necessary approvals or consents before proceeding with the assignment process.

Do you need a lawyer for this?

The biggest question now is, "Do you need to hire a lawyer for help?" Sometimes, yes ( especially if you have multiple owners ). But often for single-owner businesses, you don't   need a lawyer to start your business .

Many business owners instead use tools like  Legal GPS for Business , which includes a step-by-step, interactive platform and 100+ contract templates to help you start and grow your company.

We hope this guide provides valuable insight into the process of assigning membership interest in your LLC. By understanding the legal requirements, implications, and steps involved, you can navigate this essential task with confidence. Ready to secure your business with a professionally-drafted contract template? Visit our website to purchase the reliable and user-friendly Assignment of Membership Interest Agreement template that enables your business success.

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Transferring LLC Membership Interests Part 1 — An Overview

If 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.

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Selling or Transferring Your Membership Interest in an LLC

If you co- own an LLC with one or more partners and are ready to leave the LLC, you may be able to sell or transfer your membership interest. Having a current LLC member buy out your share in the LLC is the easiest and most direct method, but you may also be able to assign your LLC membership interest to a third party.

Assignment of interest in an LLC is a topic usually covered in the LLC’s operating agreement . If there is a provision in the agreement about LLC interest assignment, you must follow whatever the listed requirements are. If your LLC does not have an operating agreement or if the operating agreement is silent on the issue, you must apply your state’s default rules.

Each state has a set of default rules meant to govern an LLC when the members have not agreed to a set of rules in advance. Unfortunately, state rules vary. Consider the two following statutes:

Unless otherwise provided in the articles of organization or the regulations, a member’s interest in a limited liability company is not assignable in whole or in part, unless a majority of the nonassigning members consent to the assignment. -Florida Statutes Section 608.432 (Transferability of Member’s Interest)

Stated differently, you may only transfer (either by selling or freely assigning) your LLC membership interest to another person if the operating agreement specifically permits you to or if a majority of your partners consent to the transfer. On the other hand, a different state’s statute says:

Except as provided in the operating agreement, a membership interest is assignable in whole or in part. -New York Statutes Article VI Section 603 (Assignment of Membership Interest)

Stated differently, you may transfer (either by selling or freely assigning) your LLC membership interest to another person  unless  the operating agreement specifically prohibits you from doing so.

These two rules take opposite approaches to the problem, and many states follow the principals of the first statute (assignment of membership interests only if explicitly permitted) while many follow the principals of the second (unrestricted assignment of LLC interests unless explicitly prohibited).

Before you begin the sale of your LLC share, consult your state’s laws. If you cannot find the appropriate statute for your state or do not understand how the rule applies to your situation, contact your Secretary of State or a licensed business attorney.

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Should I Transfer Florida LLC Membership Interest to a Florida Trust?

How to transfer florida llc membership interest in florida.

Florida LLC owners need to know how placing their company into the ownership of a revocable living trust can help protect their business’s succession and continuity in the event of death or incapacitation. Not accounting for this in an estate plan can be a major misstep, as interest in the company will be tied up in probate court before it can be passed on to any potential heirs. However, a Florida revocable living trust can help avoid these problems and more.  

You may already know that trusts are a cornerstone of estate planning . Still, too many Florida LLC owners overlook how they can be used to ensure their business’s succession and survival should anything unfortunate happen.   

What is a Trust? 

There are many different kinds of trusts available to Florida LLC owners, but for the purposes of this article we’ll be focusing on revocable living trusts . This type of trust can be used as a way to transfer Florida LLC membership interest upon death or incapacitation while avoiding probate. It’s popular among many business owners because it can be changed and updated while the grantor is still alive.  

What are the Benefits of Transferring a Florida LLC to a Trust?

Transferring a Florida LLC to a revocable living trust can be beneficial in three main ways:  

• Probate Avoidance – Probate is an often expensive and time-consuming process that should be avoided when possible. Placing your Florida LLC into a trust can make that happen. This can be helpful for business owners, as the company could be left leaderless while the court settles the estate.
• Privacy – Probate is a matter of public record, which is another reason that it should be avoided by those with privacy concerns relating to their Florida businesses. If an LLC is owned by a trust, however, it will bypass probate, allowing succession to continue without privacy violations or delays from the court.
• Incapacity Planning – Deciding on what should happen with a Florida LLC if its owner or owners are incapacitated by illness or injury, whether permanently or otherwise, is just as vital to the future of the business as planning for their passing. A revocable living trust trust can help by, for example, creating procedures for a substitute to step in during their absence. 

How Do I Transfer Florida LLC Membership Interest to a Trust?

• Review and Amend the Florida LLC’s Operating Agreement   

If a Florida LLC has an operating agreement ( and it absolutely should ), then it must first be reviewed to see if it contains any clauses that either restrict the ability to transfer Florida LLC membership interest or require certain conditions for it to happen. This is especially important for multi-member LLCs, as the interest transfer could be invalidated if those conditions aren’t met.  

Next, the operating agreement should be updated to reflect that the LLC is now owned by the chosen trust. This can be done by filing an amendment with the State of Florida’s Division of Corporations . Don’t forget to remove anyone who will no longer be listed as having interest in the company, too.  

• Assignment of Membership Interest Agreement

To transfer Florida LLC membership interest from an individual member to a trust, the first thing that you’ll need is called an Assignment of Membership Interest Agreement. This is a document for reallocating a given member’s level of ownership in a company. In this instance, it will be used to transfer Florida LLC membership interest to your chosen trust, rather than to another member or individual.   

How to Automatically Transfer Florida LLC Membership Interest

Interest in a Florida LLC can also automatically reassigned to a designated individual under certain circumstances. In other words, these situations transfer Florida LLC membership interest while bypassing probate without using a Florida trust as an intermediary. Still, they’re no substitution for a comprehensive estate plan set up with an attorney.  

• Transfer on Death Designation

Florida LLC membership interest will also be transferred without passing through probate court if the company has a signed Transfer on Death Form. As the name suggests, this document nominates the individual or entity that will inherit the LLC upon the death of its owning member or members.  

• Operating Agreement Provisions

A beneficiary can also be named using the Florida LLC’s operating agreement. A clause along these lines can also transfer Florida LLC membership interest to a designated individual while bypassing probate. If no such provision exists, you can amend the operating agreement to include it. However, if the LLC has members, then their consent will be needed as well.  

While the potential benefits are clear, setting up a revocable living trust to transfer your LLC interest to can come with certain complications if you don’t know what you’re doing. That’s why it’s often advisable to hire professionals, such as ourselves, to manage your estate planning needs. For more, call us at (727) 279-5037 or schedule an appointment with us online .

Image by Ernesto Eslava from Pixabay .

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LLC Membership Interest Transfer Agreement: Everything You Need to Know

An LLC membership interest transfer agreement must be filled out correctly and completely to protect members' interest. 3 min read updated on February 01, 2023

An LLC membership interest transfer agreement must be filled out correctly and completely to protect members' interest.

LLC Membership Interest Assignment

An LLC membership interest assignment document is used when a member of a limited liability company wants to transfer all of his or her interest in the business to another party. This document is used when an LLC member is leaving or wants to give up his interest in the company altogether. The law will allow the ownership interest to be transferred in some cases. 

However, this transaction means the new owner won't have a right to run the LLC. He or she will only have a share of the profits and losses. Most states require Articles of Organization to be filed when forming a limited liability company . This is in compliance with the state's laws. A limited liability company can be created and operated for any reason the business chooses, as long as they are within the law.

For example, if an individual runs a small dog-walking business, this person might want to form an LLC with a co-owner so they're both protected. If one owner no longer has an interest in the LLC, he can use the LLC Membership Interest Assignment so that interest can be assigned to someone else.

These documents are short and easy to fill out. All the information that's necessary to transfer an LLC is included. There is a spot for both the person who receives the interests (the assignee) and the person who transfers the interest (the assignor) to complete the document .

The LLC Membership Interest Assignments are governed by the laws in each state; federal law isn't involved with these. To change the LLC Membership Interest Assignments form, another form is filled out online. Once complete, it can be sent in PDF and Word formats for no charge. It can be modified and used again in the future.

LLC Membership Interest Assignment: How To Use

An owner involved in an LLC is called a member. The member's interest in the limited liability company is called the ownership stake. If any member of the LLC needs or wants to transfer ownership rights , this is done with an assignment of interest.

The LLC Membership Interest Assignment is used when a member wants to transfer his ownership in an LLC. It also can be used if a person wants that interest transferred to them, assuming the current member agrees to this. Both parties should understand that the membership interest will be reassigned. Both parties should keep a copy of the agreement on file.

The LLC Membership Interest Assignment requires this information:

• The identities of both the parties as well as additional details of the membership interest.
• Whether this interest comes with the right to vote.
• What the percentage of the membership interest is.

There is an addendum at the end of the LLC Membership Interest Assignment that is optional. This is used in case the rest of the LLC members need to give full consent to the transfer.

This form needs signatures from the party receiving the document and the party who is assigning the interest. If there are only two total members, meaning just one will be left after the transfer, the process of transfer is easy. There are several forms to fill out, but the member essentially gives all his rights in the LLC to the member who remains. This transfer process differs depending on which state the transfer takes place in.

The majority of LLC statutes distinguish between member rights and member interests. The essential difference is the transferable interest of the member often only includes the right to participate in financial interests and other distributions as well as a share of profits or losses. They do not have a right to participate in control and management.

Usually, the member's financial interest can be assigned freely, given there aren't restrictions stated in the operating agreement. For example, in Washington state, an individual or entity that's assigned the member's interest can't participate in managing the LLC. The exception to this is if the assignee is admitted as a member through agreement by all the other members or through a process listed in the operating agreement.

If you need help with an LLC membership interest transfer agreement, you can  post your legal need  on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Sale Versus Redemption of LLC Membership Interests

When a client requests the preparation of a purchase or sale agreement for limited liability company (LLC) interests, counsel should always gather additional information prior to the preparation of such an agreement to obtain a complete picture of the exchange. 

Sale Versus Redemption

The primary reason is that counsel needs to determine whether the transaction will be structured as a sale of membership interests from the departing member (“Departing Member”) to a remaining member, or a redemption (or “liquidation distribution”) of Departing Member’s interest by the LLC. Counsel should also look to the LLC operating agreement for provisions setting forth transfer restrictions, procedures, and notice requirements. Additional requirements often apply if the transaction is a sale as opposed to a redemption. A transfer in contravention of the operating agreement can be deemed invalid, so counsel should review the operating agreement in its entirety to advise clients of the relevant provisions of the operating agreement and the California Revised Limited Liability Company Act.

Tax Treatment Factors

Assuming that the LLC is treated as a partnership for federal income tax purposes, the Departing Member transfers the entire interest, and the partnership status of the LLC continues with two or more members (“Remaining Members”) after the transaction, then the following tax consequences may apply.

Under the relevant statutory provisions in Subchapter K of the Internal Revenue Code (“IRC”), the LLC members are afforded some flexibility in allocating their tax burdens by structuring the transaction as a sale or a redemption. The tax differences between a sale and a redemption can be substantial, as Departing Member’s gain and Remaining Members’ tax basis will be treated differently. Additional factors affecting tax treatment may include whether the LLC assets include the so-called “hot assets” as defined by IRC Section 751 (i.e. inventory and unrealized receivables), whether the payments to Departing Member are made in installments, whether the LLC distributes property instead of cash (or a mixture of both) to Departing Member, whether goodwill is considered as part of the LLC assets, whether the redemption of Departing Member’s interest is funded by a promissory note from the LLC, and whether Departing Member’s contribution to the LLC was in the form of service instead of cash and property.   

In  Foxman v. Commissioner , 41 T.C. 535, 550-51 (1964), aff’d, 352 F.2d 466 (3d Cir. 1965), a departing partner entered into an agreement to sell his entire partnership interest to the two remaining partners. In the individual tax return following this transaction, the departing partner treated the transaction as a sale and reported a capital gain. However, the two remaining partners treated the transaction as a redemption, which resulted in a substantial reduction of their distributive shares of partnership income, and therefore a more favorable tax result to the two of them. 

When this matter eventually proceeded to the Tax Court, the two remaining partners contended that the transaction was in essence a liquidation of interests (redemption) under IRC Section 736, while the departing partner maintained that the transaction was, as previously agreed, a sale under IRC Section 741. 

In short, the Tax Court held that the transaction was unambiguously a sale, as evidenced by the agreement precisely prepared by the parties’ attorney. The Tax Court found that the records unequivocally indicated that the partners intended to take the sale route in their negotiations, and the final agreement prepared by their attorney accurately reflected such intentions with no ambiguity. The Court of Appeals affirmed the decision of the Tax Court.

The  Foxman  case illustrates the flexibility among LLC members to allocate their tax burdens to some extent, and the importance of consistent unambiguous documentation. The parties’ choice of sale or redemption will generally be respected by tax authorities as long as the supporting documentation is consistent with the members’ intentions. 

Practical Considerations

There are instances where the IRS can look behind the parties’ chosen form and recharacterize the transaction. One such instance is when the redemption appears to be funded by a Remaining Member’s contribution to the LLC. Another is when the Remaining Members’ interests do not increase pro rata after the transaction. In these circumstances, a rebuttable presumption of a disguised sale can arise under IRC Section 707. To avoid unintended consequences, counsel should carefully review all relevant facts and circumstances, including the cash situation of the LLC, when structuring the transaction.

It is also important for Counsel to realize that the interest of Departing Member does not necessarily align with the interest of Remaining Members when choosing between sale and redemption. Counsel needs to advise all parties, including the LLC, to consult with their own tax advisors for a comparison of different tax scenarios before initiating any negotiations, so that the parties can reach an informed, consistent, and reasonable decision. 

In conclusion, intentional structuring and proper documentation will serve all parties and their attorneys well. A buyer’s or seller’s remorse caused by “hindsight” tax planning and failure to comply with the LLC operating agreement can result in disruption of business operations and costly lengthy legal disputes. To prevent unintended adverse consequences, counsel should make sure the client’s transaction complies with the LLC operating agreement, and take care to prepare documentation consistent with the parties’ intentions and informed decision. 

This eBulletin was prepared by Monica Lin at CEO Law ([email protected]).

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Operating Agreement Can Avoid Probate of Florida LLC Membership Interests

From time to time we receive inquiries about using limit liability companies to avoid probate of business interests and real estate. Some people believe that they can write terms and conditions in an LLC operating agreement that control the transfer of a member’s LLC interest after the member’s death. They believe that the deceased member’s interest would immediately transfer to the designated heir because of contractual terms in the operating agreement , and that the LLC interests would not be included in a probate proceeding dealing with other assets titled in the decedent’s name.

The law on this issue was unclear. For may years I had advised clients that regardless of what is written in an LLC agreement a LLC interest must be included in the probate estate. The LLC interest would be  an asset available to pay creditors of the state through a charging lien. The value of the decedent’s LLC interest is part of the “gross estate” used to calculate estate tax liability. ZI had suggested to clients the option of the  LLC member to own the LLC interest during his lifetime as a joint tenant with rights of survivorship which would pass the interest to the surviving joint tenant outside of probate.

My advise to current clients about post-death transfers of LLC interests is different because of a 2015 Florida appellate court decision . The decision held that an LLC operating agreement could legally direct the transfer and recipients of a deceased LLC member. The transfer immediately vests in the name of the recipient upon the member’s death, and the membership interest passes outside of the decedent’s probate estate. Further, transfer directions in the operating agreement take precedence over conflicting dispositions in the decedent’s will. The general rule in Florida applicable to LLCs and to shareholder agreements in the case of a corporation is that dispositions of property in a contractual agreement will defeat a conflicting testamentary disposition.

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LLC Membership Interest Assignment Free

When one party wants to transfer the ownership of an interest in an LLC, they can use this LLC Membership Interest Assignment. The document can also be used when one party wishes a membership interest in an LLC transferred to them.

Template Overview

When one member of an LLC, also known as a Limited Liability Company, wants to transfer their interests to another party, this LLC Membership Interest Assignment can be used. Such contracts are particularly prevalent when a member of an LLC leaves the company and wants to give up his interest.

Usually, LLC Membership Interest Assignments are created with an operating LLC. In most states, a limited liability company has to have Articles of Organization (also known as Certificates of Formation). 

An LLC can be created for any reason. If an LLC owner chooses to waive their interest in the LLC, this LLC Membership Interest Assignment can be used.

This document is quite straightforward that consists of information needed to transfer an interest in an LLC. Both the Assignor (a person transferring the interest) and the Assignee (a person receiving the interest) can fill out the information about themselves.

You fill out a form. The document is created before your eyes as you respond to the questions.

At the end, you receive it in Word and PDF formats. You can modify it and reuse it.

How to use this template

When one party wants to transfer the ownership of an interest in an LLC, they can use this document. The document can also be used when one party wishes a membership interest in an LLC transferred to them (with approval from the owner). Note that both parties should completely understand that the membership interest will be fully assigned. 

The filing party will have to specify identifying information about parties and the details of the membership interest, including percentage and whether or not it comes with voting rights. 

A completed document requires signatures from both parties.

Applicable law

Individual state laws govern LLC Membership Interest Assignments.  

Ready to build your document from this template?

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Assignment of Limited Liability Company Interest to Revocable Trust | Practical Law

Assignment of Limited Liability Company Interest to Revocable Trust

Practical law standard document w-005-7338  (approx. 11 pages).