Assignment of Interest in an LLC

By Larissa Bodniowycz, J.D.

Assignment of Interest in an LLC

By Larissa Bodniowycz, J.D.

An assignment of interest is a transfer of a limited liability company (LLC) owner's interest in the LLC. The most common reasons for an LLC owner to transfer their interest in an LLC are to leave the LLC, to pay off a debt, or to secure a loan. Assignments may be full, transferring all of an owner's interest in the LLC, or partial, transferring only some of the owner's interest in the LLC. State laws and the LLC's governing documents may restrict an owner's ability to transfer their interest in an LLC.

Businessman typing at computer

Membership Interest vs. Management Roles

In small businesses, LLC owners typically wear two different hats. They are often the owners of the LLC, called members, and the managers of the LLC. When transferring an interest in an LLC, members can only transfer their membership interest, not their management role. Members who no longer wish to serve as managers of the LLC must resign from their position. The process set forth in the LLC's operating agreement or in the state laws governing LLCs directs the appointment of a leaving member's replacement.

Full vs. Partial Assignment

An LLC member can usually assign some or all of their interest in the LLC. If the member assigns their entire membership interest, the person taking the interest, called the assignee, steps into the shoes of the LLC member who is transferring the interest, called the assignor. The assignee takes the exact same membership interest that the assignor held.

There are two different types of partial assignments of an LLC interest that a member can make. First, a member may assign only a portion of their percentage ownership in the LLC. For example, a member who owns 50 percent of the LLC might assign half of their interest, leaving them with a 25 percent membership interest in the LLC after the assignment. Second, the member may want to assign only some of the rights and responsibilities of the membership interest while retaining others. For example, an LLC member might pay off a personal debt by assigning their creditor the right to their share of the LLCs profits while retaining all other membership rights, such as the right to vote on LLC decisions.

Restrictions on Assignment

Assignment of LLC interest is generally permissible, however, state law and the LLC's governing documents may restrict what can be assigned or how the assignment can be made.

Internal restrictions on assignment usually come from the LLC's operating agreement. For example, because LLCs often have a limited number of members who work closely together, the operating agreement may require the approval of the other members before a transfer of interest. Occasionally, an LLC's articles of organization, the document members complete to form an LLC, also includes restrictions on assignment.

State law may also restrict the transfer of interest in an LLC. The restrictions, if any, are usually in the section of the LLC's home state's business code that governs LLCs.

Assignments that are contrary to state law or the LLC's governing rules may later be invalidated, creating a headache for the assignor, assignee, LLC, and anyone else involved in the transaction.

How to Assign Membership Interest in an LLC

There are two components to the proper assignment of a membership interest in an LLC: the assignment agreement and compliance with LLC requirements.

The assignment agreement is a contract between the assignor and the assignee in which the assignor agrees to transfer their interest and the assignee agrees to accept the interest. Both parties should sign the agreement. The contract may have a name other than "assignment agreement," but the name does not matter, only the substance of the agreement.

In addition to that transfer agreement, assignment requires compliance with any LLC rules for assignment. If a vote of members is required, a vote must be taken and memorialized in writing. It also means that any LLC lists or spreadsheets that set out who owns which membership interest must be updated to reflect the transfer. The source of these rules is once again state law and the LLC's operating agreement.

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