Transfer of Ownership Agreement Definition
An LLC Transfer of Ownership Agreement is a legal document that facilitates the transfer of ownership interest in an LLC, or limited liability company. This agreement is essential to ensure that such transfers comply with state laws and the operating agreement governing the LLC. When an ownership interest is transferred, the rights and responsibilities of the company, as well as the economic stakes and control of the company, can shift significantly. A properly drafted transfer agreement helps to avoid disputes and confusion among members.
There are several situations where an LLC member may wish to transfer ownership. This could be the result of a retirement, death, divorce, or a sale of the business . The operating agreement of the LLC may contain specific provisions for how members may transfer their ownership interests to other members, third parties, or new members. An LLC transfer of ownership agreement, or assignment agreement, details the terms of the transfer, including consideration received and whether it is subject to any contingencies, such as approval by other members or compliance with state law.
In any case, an LLC transfer of ownership agreement is necessary to outline the distribution of profits, losses, and decision-making authority among the members. If left unaddressed, or if it conflicts with state law, the transfer could be deemed invalid, and the company could face litigation and liability.
Essential Elements of an LLC Transfer Agreement
The key components of an LLC transfer of membership interest agreement are:
- Members: The full names of the outgoing and incoming members. If it is a new LLC, the names of the existing members.
- Company: The name of the LLC.
- Transfer Being Made: The title of the ownership/share being transferred. This can be done in several ways; i.e. transfer of shares, or assignment of interest.
- Terms and Conditions: A complete list of the terms and conditions under which membership is being transferred. This will include if the transfer is allowed per the operating agreement, permitted under state law, and any other information pertinent to the transfer.
- Representation and Warranty: It is essential to state the representation and warranty of the transferor. This states that the transferor has the right and ability to effectuate the transfer, and that the transfer will have no effect on the LLC’s interests.
- Member Signatures: The signatures of all members are required to complete a transfer. This can be changed if the operating agreement states that only the transferee and transferor are needed.
How to Prepare a Valid Agreement
Crafting a comprehensive LLC Transfer of Ownership Agreement requires careful consideration of several key components. Whether or not you engage the services of a qualified attorney, be sure to clearly spell out the following in your agreement: Purchase price or formula used to compute purchase price Method of payment Any encumbrances in the company and whether the purchaser is allowed to accept any such encumbrances Date on which the purchaser will become a member or manager Any restrictions on the right of the purchaser to sell, convey, transfer, assign or encumber his or her interest in the company to a third party or other member(s)/manager(s) Any restrictions on the right of the seller or any other member(s)/manager(s) to acquire the interest of the transferee Detailed description of how the business will be run until the transfer is finalized, including allocation of profits and losses Powers of the seller, purchaser and other managers/members with respect to day-to-day management of the business during the period of transition How ownership of the company will be obtained if the transfer fails to close on the specified date Whether any disputes that arise out of the drafting of the agreement will be subject to mediation, arbitration or other dispute resolution mechanisms Any statutory requirements that must be considered, such as transferor’s consent if articles of incorporation require it Best practices While establishing the provisions above can help protect members’/managers’ interests by clarifying the transfer process, a poorly drafted transfer agreement may undermine its purpose or result in unforeseen and costly legal disputes down the road. Accordingly, take care to ensure the following when drafting: Have the agreement reviewed by a qualified attorney before signing to identify any possible pitfalls.
Sample of LLC Transfer of Ownership Agreement
The following is a sample LLC transfer of ownership agreement that offers a foundation for a more detailed transfer document. The sample does not meet standards required for transfer within an operating or purchase agreement and it is not enforceable under the laws of any state. It is only designed for purposes of example.
This Transfer Agreement (the "Agreement") is entered into as of [INSERT DATE] (the "Effective Date").
By and among
[Transferee Name], a [INSERT State] Limited Liability Company ("Transferee")
– AND –
[Transferror Name], an individual ("Transferor")
WHEREAS, [XYZ LLC], a [State] Limited Liability Company ("LLC") (the "Company"), is governed by the Operating Agreement of the Company dated April 12, MMDDYYYY (the "Operating Agreement") and the Transferor is a Member (as that term is defined in the Operating Agreement) of the Company.
WHEREAS, the Transferor wishes to transfer and the Transferee wishes to receive membership to the company.
NOW THEREFORE, in consideration of the mutual covenants undertaken herein, the parties agree as follows:
- The Transferor hereby transfers to the Transferee, its right, title and interest in and to Membership in [XYZ, LLC].
- The transferee shall execute all documents required in order to memorialize the transfer of ownership as requested by the Company.
- The transfer is subject to the terms and conditions in the Operating Agreement of the Company.
- That this Agreement constitutes the entire agreement between the parties, and that no agreement has been made by and between the parties concerning the subject matter hereof except as hereinabove set forth.
- This Agreement may be executed in counterparts regardless of the state in which such counterpart is executed. This Agreement may be executed and delivered as and for original but all of such counterparts so executed and delivered shall constitute and be construed as one and the same instrument.
- This Agreement shall be construed, interpreted and enforced in the accordance with the laws of the State of ___________.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement.
[Signed Blocks for Each Person’s Name, Signature, Title and Date]
Below is a more appropriate sample transfer of membership agreement that you might use to transfer interest between Members to LLCs . A limited liability Company is a legal entity that protects its owners from certain liabilities and other risks that other forms of business do not. Often it is desirable or essential for a Seller to sell or assign all or part of their ownership in an LLC as part of the formation of a new member or member management. As this is a significant transaction, it is advisable that the membership transfer agreement be in writing. In its simplest form an agreement between the seller and buyer should adhere to the following guidelines. This sample transfer of ownership agreement is an example of a transfer of ownership agreement.
THIS AGREEMENT FOR ASSIGNMENT OF INTEREST IN A LIMITED LIABILITY COMPANY IS ENTERED INTO AS OF THIS [INSERT NUMBER] DAY OF MONTH, [INSERT YEAR], BETWEEN [INSERT NAME OF THE SELLER ("SELLER"), AND [INSERT NAME OF THE BUYER ("BUYER")
"SELLER", IN CONSIDERATION OF THE PAYMENT TO HIM/HER OF [INSERT AMOUNT], PAYMENT; the receipt of which is acknowledged, HEREBY SELLS, GRANTS, ASSIGNS AND CONVEYS to BUYER, ALL OF HIS OR HER INTEREST IN [INSERT NAME OF THE COMPANY].
Buyer hereby agrees to assume responsibilities as they exist as of the date hereof, and to continue in such capacity as Buy is.
This agreement shall be binding upon and inure to the benefit of both the SELLER and the BUYER and their respective heirs, successors and assigns.
THE SELLER HEREBY WARRANTS AND REPRESENTS AS FOLLOWS:
That he/she is the lawful owner, free and clear of all encumbrances and restrictions; has good and valid right to sell the interest being conveyed herein;
That the SELLER has full power and authority to enter into and perform this agreement and that this is a binding obligation and is enforceable against the SELLER IN ACCORDANCE WITH THE TERMS HEREOF; and
That the SELLER is the only member, and as such has full power and authority to act on behalf of himself/herself in this matter.
THE BUYER HEREBY WARRANTS AND REPRESENTS AS FOLLOWS:
THE SELLER MAKES NO WARRANTIES AS TO, NOR SPECIFICALLY DISCLAIMS ANY WARRANTIES CONCERNING, THE FINANCIAL CONDITION, OR PROSPECTIVE OR PRIOR OPERATION OF THE COMPANY NOR AS TO ITS GOOD STANDING UNDER APPLICABLE STATE OR FEDERAL LAWS, BEING FULLY COGNIZANT OF THE FINANCIAL CONDITION AND CAPABILITIES OF THE BUSINESS OF THE COMPANY IN WHICH HE/SHE INTENDS TO ACQUIRE AN INTEREST.
Compliance Requirements
From a compliance perspective, the process of transferring ownership of an LLC member’s interest to another person is relatively straightforward, although it always should be carefully documented in line with the terms of the LLC’s operating agreement (which typically specifies what occurs during the transfer process) and applicable law. For example, certain states require that members provide written notice of their intent to transfer their interest or even require members to offer their membership interest first to other members in the LLC. Thus, the laws of the state in which the LLC was formed must be reviewed in order to comply with state regulations and LLC provisions. Non-compliance can create considerable legal and tax issues later on in the transfer process.
In many cases, there are federal or state laws that may also govern transfer of an LLC interest. For example, if an LLC is used as an investment vehicle or under certain conditions, it will be considered an "investment company" under the Investment Company Act of 1940, as amended (the "Investment Company Act"). In such circumstances, the transfer of an LLC interest may trigger compliance with the Investment Company Act, including registration and disclosure requirements.
Common Issues and Solutions
Common challenges that often interrupt the transfer process may include:
Lack of financial resources – A business partner or member may be forced to terminate their relationship to save on costs, which may be a result of a forced sale. Not everyone has the financial means to buy another partner’s share. If none of the other members is willing or able to finance the share, the organization could fail. Solution: If you can’t buy them out, try to sell them out. Employees of the company as well as competitors in the industry may be interested in purchasing the business from your ownership group.
Time Constraints – Members often have deadlines for executing the transfer of their ownership interests. To meet these deadlines , everyone in the organization must be in agreement on the terms. Solution: Often the way to come to an agreement is to have a sit-down "business intervention." At that meeting, there must be one goal in mind: to understand the need for and the benefits to each member or employee of executing the transfer.
Discrepancies in the Criminal Records of the Members – Owners, partners and members often are forced to sell their shares because one or more of them have been busted for a crime and the company’s bylaws or operating agreement states that the company can be dissolved and/or sold if one of the partner’s commits a crime. A better solution is to decide that sharing and understanding is better than bickering and legal wrangling. Constant communication to all parties involved is a critical part of creating a healthy organization.