Selling An Interest In A Missouri LLC

Question: Can I sell my interest in a Missouri LLC that does not have a signed written operating agreement? I am an equal 1/3 member in the LLC. Do I need approval from the other members? Dan.

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Below are relevant provisions from the Missouri LLC Act.

Mo. Stat. §347.115. Interest in company is personal property, assignability. 1. The interest of a member in a limited liability company is personal property and, except as provided in the operating agreement, may be assigned in whole or in part. An assignment of an interest does not entitle the assignee to participate in the management of the business and affairs of the limited liability company or to become or to exercise the rights of a member, except as provided in section 347.113. An assignee that has not become a member shall only be entitled to receive, to the extent assigned, the share of distributions and profits, including distributions representing the return of contributions, to which the assignor would otherwise be entitled with respect to the assigned interest. * * *

Mo. Stat. §347.113. Members--additional members. 1. A person is a member at the time the limited liability company is formed if such person is identified as a member in and signs, in person or by an attorney in fact, or otherwise becomes a party to the operating agreement.

2. A person may be admitted as an additional member by signing, in person or by an attorney in fact, or otherwise becoming a party to the operating agreement and by complying with the applicable terms and conditions of the operating agreement or, if the operating agreement does not so provide, upon the written consent of all members; or in the case of an assignee of the interest of a member who has the power, as provided in the operating agreement, to grant the assignee the right to become a member, upon the exercise of that power in compliance with any conditions limiting the exercise thereof.

Sorry Dan but it does not look good. Can you sell your LLC interest? This appears to be the case under Mo. Stat. §347.115. Note: a sale is within the meaning of the term assignment. The more important question is whether the buyer of your LLC interest can become a member of the LLC. As I read Section 347.113, unless the operating agreement states otherwise (and your LLC does not have an operating agreement), all members must agree to the admission of a new member.

Bottom line: you can sell your LLC interest to another party who gets all your rights to distributions from the LLC; however, the buyer cannot participate in the management of the LLC by becoming a member.

Documenting Member Withdrawal

Question: I need to know how to go about taking a member off of the LLC Operating Agreement. The members name is Sandra who is no longer going to be with the company. Any information you could give me to help us go about dropping a member would be very much appreciated. Phil.

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I'll assume Sandra is voluntarily withdrawing from the LLC as a member or otherwise being bought out. The method by which a member withdraws should be set forth in the LLC operating agreement. If you purchased an LLC operating agreement form from MedLawPlus.com®, it offers options for users to include member withdrawal provision in the agreement and, if you so elected, those terms would be found in paragraph 7.2. See sample LLC operating agreement. If you don't have an operating agreement that specifically sets forth how a member withdraws, seek counsel from a local lawyer with experienced in corporate / business law. The best course of action is to have a local lawyer handle the entire transaction regardless of whether or not you have a operating agreement. If a purchase of an LLC interest from a withdrawing member is involved, you need a sales contract. See the MedLawPlus.com® asset sales contract and determine whether or not it fits your needs. Again, the advice is lawyer is encouraged.

The next step is amend the operating agreement to reflect to the new membership interests. Instructions on this topic can be found here. Do you need to file anything with the secretary of state's office to reflect the change in ownership? Normally, nothing is filed at the time of the withdrawal and the secretary of state's office becomes aware of the withdrawal of a member when the annual report is filed; however, this is not universally the case. Some states have specific forms for LLC member withdrawal that are filed at the time of the event. I suggest you contact the corporate division of the secretary of state's office and ask them. Links to the secretary of state office for each of the 50 states may be found here. State by state information.

Accounting Practice in Colorado Operating As LLC

Q. Hello, I am a CPA in Colorado, thinking about forming a single member LLC that provides tax, bookkeeping, payroll, etc. services (no independent audits). Am I required to form a PLLC? What are the differences between an LLC and a PLLC? Could you please explain the extent of the limited liability protection? (I had heard that the protection does not cover personal assets in the event of a lawsuit resulting from errors/mistakes, but rather only in instances of, for example, a client injured onsite.) Thank you!

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In Colorado, and most states for that matter, there is not a separate legal entity type called 'PLLC' (professional limited liability company). See list of entity types from Colorado Secretary of State's office. Professionals form a standard LLC; however, the rules of the applicable state professional organization (bar association, medical board, board of accountancy, et cetera) mandate that the LLC carrying on a profession operate under certain additional rules not applicable to normal LLCs. These rules are not found in the state corporate code (i.e., Colorado Stat. § 7-90, et alia) but, rather, state laws specifically governing the profession in question.

The case of accountants, the application Colorado law is § 12-2-117. Of particular interest on the issue of liability is paragraph (3)(c) of this statute:

(c) All partners, shareholders of the corporation, or members of the limited liability company shall be jointly and severally liable for all acts, errors, and omissions of the employees of the partnership, corporation, or limited liability company except during periods of time when the partnership, corporation, or limited liability company maintains in good standing professional liability insurance, or designated or segregated moneys in lieu of such professional liability insurance, which meets the standards set forth in subparagraphs (I) to (V) of this paragraph (c) ... .

(Emphasis added.) What I take away from the above is that a member of an accounting LLC in Colorado is afforded the standard liability protection of LLCs EXCEPT for "errors and omissions of employees", for which they are personally liable. The Colorado law contains a further exception to the exception holding that members of accounting LLCs avoid personal liability for the errors and omissions of their employees by maintaining insurance that meets the standards set forth in the statute.

This earlier blog post discusses PLLCs further. I believe this form is used to qualify your PLLC with the Colorado Board of Accountancy after its formation. Further, MedLawPlus.com® sells an operating agreement specifically designed for PLLCs.

Other Members Wish To Sell Their LLC Interests

Q. I am the managing member of a 4 member Delaware LLC. The other three members apparently are in discussion to sell their interest in the LLC. Can they do that? What happens to the loan we took out to purchase the business in 2006?

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The place to start is your LLC operating agreement. Does it contain any restrictions upon the sale or transfer of LLC interests by members? If not (or you don't have an LLC operating agreement), then your LLC is covered by the default provisions of the Delaware LLC Act. In particular, § 18-702 has bearing on this issue. It provides, in pertinent part:

§ 18-702. Assignment of limited liability company interest.
(a) A limited liability company interest is assignable in whole or in part except as provided in a limited liability company agreement. The assignee of a member's limited liability company interest shall have no right to participate in the management of the business and affairs of a limited liability company except as provided in a limited liability company agreement and upon:
    (1) The approval of all of the members of the limited liability company other than the member assigning the limited liability company interest; or
    (2) Compliance with any procedure provided for in the limited liability company agreement.
(b) Unless otherwise provided in a limited liability company agreement:
    (1) An assignment of a limited liability company interest does not entitle the assignee to become or to exercise any rights or powers of a member;
    (2) An assignment of a limited liability company interest entitles the assignee to share in such profits and losses, to receive such distribution or distributions, and to receive such allocation of income, gain, loss, deduction, or credit or similar item to which the assignor was entitled, to the extent assigned;* * *

My reading of the above language is that the other members may sell their LLC interests; however, the purchaser does not become a member of the LLC unless the remaining LLC members vote unanimously to admit the purchaser as a member. What does the purchaser get if is blocked from becoming a member? The right to share in the LLC profits and losses and to receive any distributions otherwise allocated to the LLC interest purchased. Can the purchaser vote you out as managing member? I don't see how that happens without your consent to make the purchaser a member. Unless important facts are missing from your question, this transaction is highly unlikely to happen without your consent.

What about the loan used to purchase the business? The selling members are not relieved or any LLC debt they guaranteed merely by selling their LLC interest. Any deal to replace the purchaser as guarantor on this debt for the sellers is matter to be negotiated privately with the lender. It may be that the sales price is assumption of the debt.

As always, the best advice is to address restrictions on transfer of LLC interests in the LLC Operating Agreement at the initial formation of the LLC.