Friday, October 24, 2008

Admission of New LLC Members

In today's economic environment, small business is looking for additional capital. With the credit markets in turmoil, bringing in additional owners is option many shall look at. For an existing LLC, the operating agreement should address the preconditions for admission of new members. Typically, there are three drafting options for member vote necessary to admit a new memeber: (a) simple majority, (b) super majority (67%), or (c) unanimous vote. Further, it is standard for operating agreement to state that new members must consent to the terms of the existing operating agreement upon admission. What if your operating agreement fails to address the issue? Then your LLC is governed by the default LLC act provisions of the state where you were organized. Below are examples from various state laws on the admission of new LLC members where the membership interest is purchased from the LLC: What if a member wishes to sell his membership interest to a third party not currently a member of the LLC? Can this stranger walk in off the street to become a member of your LLC? This case is the sale of the member interest by an existing LLC member as opposed to the sale by the LLC itself. If we were talking about S corporations, the answer would be that only a buy-sell agreement among the shareholders could prevent the sale of stock to an outside party. In the case of LLCs, the member operating agreement can restrict the purchaser (also referred to as an assignee) from becoming a member absent consent of the other LLC members. If the LLC agreement is silent about the purchaser of an LLC interest becoming an LLC member, the default provisions of the state LLC act apply. The states are generally split between requiring unanimous or majority in interest consent of the existing LLC members.

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