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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.
Often, an LLC’s Operating Agreement can also provide an exception to the requirement for consent to transfers that are related to estate planning.
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.
Need a little more guidance? Click here to review our transfer of ownership checklist.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.