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Changes are inevitable in business. When you own a Delaware LLC, however, the changes can be instituted quickly and easily without having to file costly amendments with the state to update the entity’s ownership.
Founders and investors in an LLC often look to the future sale or transfer of their interests in the entity, considering how they can monetize their interests down the road by transferring them to another member or a new investor.
In Delaware, the LLC Operating Agreement spells out all conditions of future sales or transfers. Traditionally, the LLC Operating Agreement is amended internally within the LLC, and the change of interest is not recorded or provided to the state of Delaware’s Division of Corporations.
Startup founders want the ability to control the identity and nature of the company’s investors. In the early stages of a new business, there is often a rapport and a level of trust between the founders and the company’s early investors.
In addition, early investors are often important in providing strategic advice on the company’s direction, operations and business. Founders want the ability to limit transfers and to possess a veto right over any transfers of interest, which can be done with a properly constructed LLC Operating Agreement.
Ordinarily, transfers are not permitted without the consent of the managing member or manager of the company. Where permission is granted, the LLC Operating Agreement often indicates certain requirements for transfers.
For example, the Operating Agreement can state that transfers will not be permitted where the transfer would create issues for the company or where the transfer will have adverse tax consequences for the company.
Under this exception, members can transfer interests to their family members, to trusts or to other entities created for the benefit of family members. In each case, the recipient may receive only economic rights rather than voting or management rights, unless it has been outlined otherwise in the Operating Agreement.
Although transferring interests seems easy enough, such transfers raise many concerns, and an LLC’s Operating Agreement should clearly address the circumstances under which transfers will be permitted as well as the process for effecting transfers.
It is wise to consult an attorney prior to engaging in or permitting transfers of interests in order to ensure all applicable requirements are satisfied.
As part of our services, we offer free templates for LLC Operating Agreements, amendments to an LLC’s Operating Agreement to transfer membership interest, and templates for LLC Membership Certificates that show the ownership in the form of percentage or units.
THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.