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.
Sunday, May 6, 2012
Wednesday, November 9, 2011
Member Blocking Sale of an LLC interest
Q. I own 65% of an LLC and want to sell. Other member agreed but is now making certain demands or he will block the sale. Can he do that even if I own the majority ownership interest in the LLC? Scott, Oregon
A. To my knowledge, one LLC member cannot block the sale of a limited liability company interest by another member unless such authority is granted in a buy-sell agreement between the members (or language of the operating agreement). However, we must make a distinction between blocking the sale of a limited liability company interest and blocking the buyer from becoming a member. These are not synonymous concepts. The Oregon Limited Liability Company Act states the following regarding admission of new members:
When the owner of an LLC members interest transfers the interest to a third party who for whatever reason does not become a member, the transferee becomes the holder of an economic interest in the LLC. I didn't see a statute expressly addressing the rights of a holder of an economic interest in an Oregon LLC so I won't comment further. Perhaps your operating agreement addresses the issue. Normally, an economic interest holder is allocated all income and losses (and receives all property distributions) that otherwise would have gone to the member from who the LLC ownership interest was acquired.
A. To my knowledge, one LLC member cannot block the sale of a limited liability company interest by another member unless such authority is granted in a buy-sell agreement between the members (or language of the operating agreement). However, we must make a distinction between blocking the sale of a limited liability company interest and blocking the buyer from becoming a member. These are not synonymous concepts. The Oregon Limited Liability Company Act states the following regarding admission of new members:
Section 63.245 Admission of members. * * *Emphasis Added. Your situation, based on the above facts, is covered by Section 63.245 in my view. That means that although you can sell your LLC interest to a 3rd party, that individual does become an LLC member unless and until a majority of the remaining members votes in favor of admitting the buyer as a member. If you have an operating agreement and it addresses how a new member is admitted to the LLC, then the terms of the operating agreement override Section 63.245.
(2) After the filing of the limited liability company’s initial articles of organization, a person may be admitted as a member of the limited liability company upon compliance with the articles of organization or any operating agreement, or, if neither the articles of organization nor any operating agreement so provide:
(a) In the case of a person acquiring a membership interest directly from the limited liability company, upon the consent of a majority of the members;
(b) In the case of an assignee of a limited liability company membership interest not governed by paragraph (c) of this section, upon the consent of a majority of the members other than the assignor; or
(c) In the case of an assignee of a membership interest in a limited liability company in which, immediately following the assignment, the limited liability company otherwise would have no members, simultaneously with and upon the assignment of the membership interest.
When the owner of an LLC members interest transfers the interest to a third party who for whatever reason does not become a member, the transferee becomes the holder of an economic interest in the LLC. I didn't see a statute expressly addressing the rights of a holder of an economic interest in an Oregon LLC so I won't comment further. Perhaps your operating agreement addresses the issue. Normally, an economic interest holder is allocated all income and losses (and receives all property distributions) that otherwise would have gone to the member from who the LLC ownership interest was acquired.
Wednesday, September 7, 2011
Bankruptcy of Member--California LLC
Question: We have an LLC in California with 4 equal members. Two members are going through Ch.13 bankruptcy. Our operating agreement states that the LLC shall be dissolved by bankruptcy of a member. It also states that if at least two members remain they can vote to continue the company within 90 days. If the two remaining members vote to continue the company does that mean the two members in bankruptcy only have an economic interest in the company? Does just filing for bankruptcy dissolve the LLC or does the court need to take their ownership in order for the LLC to be dissolved?
Answer: The bankruptcy of a member is not an event of dissolution under the California LLC Act, see Cali. Corp. Code § 17350, et alia. Thus, unless your LLC operating agreement clearly states that the company is to be dissolved due to the events described above, there is no dissolution. It comes down to interpretation of the LLC operating agreement. More importantly, I believe the burden will be on those members wishing the LLC to be dissolved to show that events have occurred that require dissolution of the LLC under the operating agreement. Those members wishing dissolution will have to file a petition with the court claiming an event of dissolution has occurred under the operating agreement per Section 17350.(a).
Your ultimate questions seems to be what happens to the interests of the members who declared bankruptcy if the company is able to continue. The LLC Acts of most states explicitly provides that status as an LLC member ends upon the filing of bankruptcy petition and, thereafter, the member (or his bankruptcy estate) is merely a holder of an economic interest. For example, see Del. LLC Code § 18-304. Events of bankruptcy. I could not find a section in the California LLC Act specifically addressing bankruptcy of a member such as the linked section from the Delaware Act; however, there are several provisions in the California Act regarding assigned of LLC members interests that I think essentially get one to the same place.
Please take the issue to a local bankruptcy attorney for a legal opinion on this issue.
Answer: The bankruptcy of a member is not an event of dissolution under the California LLC Act, see Cali. Corp. Code § 17350, et alia. Thus, unless your LLC operating agreement clearly states that the company is to be dissolved due to the events described above, there is no dissolution. It comes down to interpretation of the LLC operating agreement. More importantly, I believe the burden will be on those members wishing the LLC to be dissolved to show that events have occurred that require dissolution of the LLC under the operating agreement. Those members wishing dissolution will have to file a petition with the court claiming an event of dissolution has occurred under the operating agreement per Section 17350.(a).
Your ultimate questions seems to be what happens to the interests of the members who declared bankruptcy if the company is able to continue. The LLC Acts of most states explicitly provides that status as an LLC member ends upon the filing of bankruptcy petition and, thereafter, the member (or his bankruptcy estate) is merely a holder of an economic interest. For example, see Del. LLC Code § 18-304. Events of bankruptcy. I could not find a section in the California LLC Act specifically addressing bankruptcy of a member such as the linked section from the Delaware Act; however, there are several provisions in the California Act regarding assigned of LLC members interests that I think essentially get one to the same place.
Cal. Corp. Code. § 17300. A membership interest and an economic interest in a limited liability company constitute personal property of the member or assignee. A member or assignee has no interest in specific limited liability company property.These are default provisions of the California LLC Act for the situation where a creditor takes possession through assignment of a member's interest in the company. They apply when the operating agreement is silent on the issue. If your operating agreement states that a member becomes an economic interest holder upon filing bankruptcy, then it controls over the Cali. LLC Act. Under the California LLC Act, it looks like the bankruptcy estate of the members who declared bankruptcy are essentially assignees of the member-debtor and, thus, only entitled to a charging order and, further, are not entitled to become members of the LLC.
Cal. Corp. Code. § 17302. (a) On application by a judgment creditor of a member or of a member's assignee, a court having jurisdiction may charge the assignable membership interest of the judgment debtor to satisfy the judgment. The court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor in respect to the limited liability company and may make all other orders, directions, accounts, and inquiries that the judgment debtor might have made or that the circumstances of the case may require.
Cal. Corp. Code. § 17303. (a) Except as otherwise provided in the articles of organization or the operating agreement, an assignee of an interest in a limited liability company may become a member only if a majority in interest of the other members vote in favor of the assignee's admission to the limited liability company as a member.
Please take the issue to a local bankruptcy attorney for a legal opinion on this issue.
Wednesday, July 6, 2011
Documenting LLC Ownership Interests
Q. How can I show evidence of a sale or transfer of an LLC in MO? My son and I own 50% of a family LLC and my husband has either given or sold the LLC to his brother in KS who did own only 1%. Sandra, MoA. I am a little confused by the question; however, I read the situation as one where your husband has attempted to sell an LLC ownership interest to his brother that you believe you and your son have an ownership interest in. Further, your issue is how to prove or document that you and your son own a 50% interest in an LLC now claimed by your brother-in-law.
This is a good question as the ownership interests of the respective members is not (to my knowledge) recorded in the annual report filed with the Missouri Secretary of State. However, the ownership interest of each member should be recorded in the LLC operating agreement. If your company does not have an operating agreement (or the ownership interests have changed and the new percentages not documented) then the next best document source is probably the LLC's annual federal income tax report (which is most likely an IRS form 1065 although an LLC can file another form depending on its tax status). If the LLC is taxed as a partnership (which is the most common form of taxation for LLC's with more than one member), each member is supposed to receive a form K-1 when the tax return for each year is filed. The form K-1 contains the ownership interest in the LLC for the member.
Other than that, the LLC should maintain internal books and records that record the ownership interest of each member. RSMO § 347.091 sets out the documents each LLC is required to maintain and the right of a member to inspect said documents.
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