Sunday, May 6, 2012

Member Wishes To Sell LLC Interest To Outside Party

Question: We have 3 equal members in an LLC formed in Georgia in 2005. Can one of the members sell or transfer his/her stake to an outside buyer (non-member) without consent from the remaining two buyers? There is no operating agreement established among members. Will the buyer automatically become member of the LLC? Does he have to get consent from the remaining two current members? May, Georgia

Answer: When a limited liability company (LLC) lacks an operating agreement, then the default provisions of your state LLC Act control. Thus, answering your question turns on the application of Georgia LLC law to the facts presented. Specifically, whether Georgia laws prevents a third-party from purchasing an ownership interest of a member without the consent of the other LLC members and, then, stepping into the sellers shoes as a voting member.

Georgia Rev. Stat., Title 14, Ch. 11 contains the LLC laws for your state. The matter really boils down to two separate questions. First, whether an existing member can sell his company interest without consent of the other members. Second, if sale of the member interest is allowed, what status does the buyer acquire? Absent a member buy-sell agreement or other restrictions in the operating agreement preventing members from transferring LLC interests, the answer appears to be "yes", members have a right to sell their LLC interest. O.C.G.A. § 14-11-502 states, "Except as otherwise provided in the articles of organization or a written operating agreement: (1) A limited liability company interest is assignable in whole or in part; ... ." The term "sale" falls within the broader definition of "assignment".

Thus, this Georgia statute authorizes the sale of a member interest but what status does the buyer acquire in the LLC? Does the buyer become a voting member? Under Georgia LLC law (as with most states), an assignee of an LLC ownership interest does not automatically become a member of the company. O.C.G.A. § 14-11-503, entitled "Rights of assignee to become member", states that "Except as otherwise provided in the articles of organization or a written operating agreement: (1) An assignee of a limited liability company interest may become a member only if the other members unanimously consent; ... ." This means that, unless the operating agreement or articles of organization provide otherwise, the buyer of an LLC interest from an existing member does not also become a member of the LLC absent unless the remaining members of the company consent.

What is the status of an assignee of an LLC interest who is blocked from becoming a member? The assignee lacks any ability to participate in the management of the company but is, however, granted rights in the profits and losses of the company under O.C.G.A. § 14-11-502(2), "An assignment entitles the assignee to share in the profits and losses and to receive the distributions to which the assignor was entitled, to the extent assigned; .... ." This means the assignee is allocated all profits and losses (and property distributions) that otherwise would have normally been allocated to the ownership interest he/she purchased. The assignee's role in the LLC somewhat resembles a passive shareholder in a corporation. It's not a perfect analogy but, hopefully, conveys the nature of the relationship of the parties’ relationship after assignment of the member interest.

3 comments:

Naps_90 said...

I have a question regarding a NYS registered LLC.
At the time the Articles of Organization was filed, I was the only member listed. I later partnered with 2 other individuals about 7 months ofter forming the LLC and gave one a 35% interest and the other a 30% interest. Thing have gotten pretty bad and I resigned as the company President but still have the 35% interest. The lawyer who created the new membership certificates used our corporate minutes from a meeting as the basis for doing them - I am looking to see if the proper steps were following in the transfering of these memberships units - question - must these units be transfered for something of value - even if it is just 1 dollar ? Also can the units be transfered based on me and the 2 new partners agreeing to the split (35/35/30) or do I as the original member need to do something specific - what I am looking for is some loop hole that will allow me to regain control of my LLC.

Naps_90 said...

Also - we do not have an operating agreement

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