An LLC is a hybrid between a corporation and a partnership. An LLC can be taxed as a partnership, S or C corporation, or a disregarded entity.
The IRS established federal default rules in 1997 to simply how an LLC is taxed. One member is a disregarded entity, and two members are tax as a partnership.
In either situation, you can file form 8832 to have an LLC taxed as a Corporation or form 2553 to be taxed as an S corporation.
One of the subjects that 90% have an LLC does not properly handle an LLC interest transfer to another.
An LLC interest may be transferred by a bill of sale, assignment, or comparable document as personal property.
If the interest is documented certificates, like stock certificates, it should be possible to transfer an interest by endorsing the certificate, by granting a power of attorney to the transferee, or by granting a type of power as a stock power.
To be effective, the transferee must also cause the interest transfer to be reflected in the LLC’s books. The transfer must first be approved under the LLC’s requirements (e.g., approval of at least a majority of members). It is recommended that an LLC record the transfer of membership interests in the same fashion as a corporation uses a stock transfer ledger.
This is a key point…the transfer of an interest to a person does not by itself grant the status of a member in the LLC.
Rather, the transferee is merely an assignee of certain economic rights unless the other members vote and approve the interest transfer.
The various state acts generally provide that unless the members have otherwise agreed, a membership interest is assignable in whole or in part.
Although some statutes may refer to a membership interest’s free assignability, what is actually meant is the free assignability of the financial rights, not governance rights.
Typically, members will want to impose restrictions on assignability, and the operating agreement would provide this language. An operating agreement also should define if the transfer restrictions did not apply to transfers to members, non-members, or both of the LLC.
This may surprise you, but an LLC member can assign their interest without anyone’s consent. However, the transferee will be an assignee and NOT a member.
Only members can vote and exercise other members’ rights, but not an assignee, like a member, may receive distributions of cash or property.
In conclusion, it is very important to read and understand your LLC operating agreement. If you are looking to assign interests and make sure it is done properly, an attorney may be recommended.Tags: LLC membership interest, LLC taxation, partnership taxation