Membership Interest Transfer Agreements are typically used to document the sale of membership interests in an LLC from an existing member to one or more remaining members or, in some cases, to new members. For example, if one of the members in an LLC wants to leave the business for whatever reason, the company operating agreement will often require the departing member to sell their interest in the company to the remaining members or even back to the company.
Membership interest transfer agreements are typically shorter and more straightforward than other business purchase agreements. A membership interest transfer agreement should identify the parties to the transaction, place the membership interest being transferred, and require the buyer to agree to be bound by the company’s operating agreement. The agreement should also ensure that the transfer of the membership interest doesn’t violate securities laws. However, unlike an asset purchase where the buyer is only acquiring the company's assets, in a membership interest transfer, the buyer is taking on all of the existing rights and obligations of a member of the LLC. This might include obligations to personally guarantee the company’s debts or to meet specific fiduciary duties to the other members.
While the agreement may end up being simpler than your typical purchase agreement, we still need to make sure that the departure is handled in a way that won’t leave the business or the departing individual facing unexpected liabilities. First, are all of the business partners ok with the person leaving? If the departure is amicable, then documenting changes in ownership will be easier than if someone is being forced out or if their departure will negatively impact the business (perhaps because they’re taking credit, relationships, expertise, etc., with them). In the latter situation, we may first need to review any applicable employment, shareholder, close corporation, or operating agreements so that the departure or separation doesn’t give rise to breach of contract claims.
Company contracts should also be reviewed to ensure that the departing member or shareholder isn’t a personal guarantor of the company’s obligations and that the departure won’t trigger change in ownership clauses in any company agreements.
Next, we need to determine the value of the departing person’s interest in the business. Ideally, the company’s operating agreement or the relevant shareholder agreement will set forth a method for determining the valuation and what, if anything, the departing member or shareholder is entitled to.
Finally, we document the sale of the membership interests (or shares) to the remaining members or the company itself in a membership interest transfer agreement or similar type of document. Not only does the transfer agreement set forth the price and the fact that the interests or shares changed hands, but it also addresses how outstanding liabilities were cleared up or transferred so that no one sues later. The transfer agreement may even establish (or reiterate) non-compete and non-solicitation provisions.
During this process, the remaining owners should also update company bank accounts, change the responsible party with the IRS, update their registered agent, and update any documents that list the owners and their relative interests in the business.
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