Assignment of Interest in an LLC

By Jennifer Williams

Unlike corporate shareholders who are usually one step removed from the action, LLC members often have a hand in the day-to-day operations of the company. A member is often a company founder and takes a personal interest in company growth and direction. There are circumstances in which the member may choose, for the benefit of the company, to assign part or all of his interest in the company. Assignments are addressed by state law, and even though the specifics are left to the individual LLC's articles of organization and operating agreement, state law sets out the basic requirements for handing off a member's share of an LLC.

Unlike corporate shareholders who are usually one step removed from the action, LLC members often have a hand in the day-to-day operations of the company. A member is often a company founder and takes a personal interest in company growth and direction. There are circumstances in which the member may choose, for the benefit of the company, to assign part or all of his interest in the company. Assignments are addressed by state law, and even though the specifics are left to the individual LLC's articles of organization and operating agreement, state law sets out the basic requirements for handing off a member's share of an LLC.

Reasons for Assignment

An LLC member may decide to assign a percentage of his membership interest to a lender as collateral for a loan. Assigning a member's financial interest guarantees the lender a return on the investment while the member retains membership and whatever percentage of the financial interest not assigned. Assignments are also made to satisfy existing personal debt or debt of the business. The member assigns all or part of his interest until the debt is satisfied from the proceeds of the business.

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Are Assigments Allowed

State LLC laws provide for assignment of either whole or partial interests in an LLC formed in that state subject to any prohibition or restrictions presented by the operating agreement or articles of organization. Alternatively, state law may restrict any assignment except as allowed in either corporate document. If assignment is not addressed in either corporate document, then assignments are either allowed or not based solely on the generalized statement found in the state's LLC statutes.

Assignee's Rights

Generally state law prohibits an assignee from participating in business decisions or the operations of the LLC unless the articles or operating agreement provides otherwise. If participation is allowed, any conditions provided by the corporate documents must be met. Additionally, state law may impose additional conditions, such as unanimous approval of the members. In Florida, for example, assignees are not automatically allowed the rights and privileges of LLC members, but are restricted to receiving the specified portion of the assigning member's monetary interest in the LLC. This interest includes the assigning member's share of profit, loss, income distribution and credit.

Assignor's Rights

Once an LLC member assigns all of his or her rights in an LLC, some state LLC laws, such as Texas, declare that the assignor is no longer a member of the LLC. All member rights are therefore nullified by the assignment, even though the assignment is limited to monetary interest.

Assignee's Liability

If an assignee becomes a member, she assumes only the membership rights and restrictions of the assigning member. Assignees are shielded from the assigning member's share of liability until the assignee becomes a member in her own right. However, some jurisdictions, such as Florida and California, stipulate that the assignee assumes the assignor's liability for any unlawful distributions the assignor may have made as a member if they would be easily discovered.

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References

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