Transfers of LLC interests are common in many areas of practice. Whether you practice family law, estate planning, real estate, or business law, you deal with transfers of LLC interests. I find it helpful to consider the who, what, when and how questions when considering LLC interest transfers.
Who is Transferring?
There can be many transferors of an LLC interest: an estate upon the death of a member, a bankruptcy trustee upon the bankruptcy of a member, a human making an inter vivos transfer or an entity transferring an interest (I am sure there are other transferors). Different transferors raise different issues.
What is Being Transferred?
The Washington Limited Liability Company Act calls a “transferable interest” RCW 25.15.006(21) only economic rights associated with an interest. It is critical to note that the transferee of a “transferable interest” is NOT admitted as a member, without other action. If the transferor intends for a transferee to receive a full membership interest, all of the other members must consent. Is the transfer permitted? Some LLC agreements allow for transfers of a transferable interest, but do not permit the transferee to be admitted as a member.
In the event of a withdrawal of a member, nothing is transferred. Rather, the withdrawing member surrenders their transferable interest and rights as a member. RCW 25.15.006(23).
When Will it be Transferred?
Transfers (whether via gift or a sale) during the lifetime of the member are treated differently than transfers occurring as a result of the death of the member. Note that an LLC agreement may permit a testamentary transfer, which is not subject to will formalities. RCW 11.02.091.
How is it Being Transferred?
Did the transfer occur via a written assignment? A properly drafted assignment should include what is being transferred, who is transferring it, an acceptance by the transferred, an agreement to be bound by the LLC agreement and consent by the company and all members. Of course, transfers can be done orally or by operation of law.
When thinking about a transfer of an LLC interest ask yourself the above questions, especially in light of the recent Delaware Supreme Court decision in Holifield v. XRI Investment Holdings LLC, 304 A.3d 896 (2023). In that case, the court considered (among other things) whether a transfer was “incurably void” and whether parties could contract for such a result. Relying on the principle that freedom of contract extends to contractually specified “incurable voidness”, the court held an attempted transfer was “incurably void”. For anyone engaged in drafting LLC agreements or attempting transfers of LLC agreements, Holifield is a must read.
Beresford Booth Lawyers are committed to delivering exceptional legal services with a focus on transparency, integrity, and personalized attention. Understanding the complexities surrounding Limited Liability Companies (LLCs) can be daunting, but our team is here to navigate you through every step. Whether you’re forming a new LLC, managing compliance, or facing legal challenges, we have the expertise and dedication to support your business’s success. Please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100 to discuss how we can help with your LLC needs and beyond.