Should We Issue LLC Membership Certificates?
A friend recently asked whether his limited liability company, which was seeking investors, should issue LLC membership certificates.
The Section reference below has been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).
Here are the points that I made in my response.
- A California limited liability company may, but is not required to, issue LLC membership certificates (Corporations Code Section 17705.02(c)).
- However, if the operating agreement includes membership transfer restrictions, buy-sell provisions, reverse vesting, or the like – features that should be included in any multi-member LLC that is seeking investors – then LLC membership certificates with applicable legends should be issued. The reason: If there are no LLC membership certificates, then a transferee who receives a former member’s interest without knowledge of such provisions may successfully claim that s/he is not bound by them.
- Should My Corporation Provide Stock Certificates to Shareholders?
- Printing Legends on Share Certificates ? Why and How
- Can I form an LLC without a lawyer?
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
11/25/2012 | 7:40 am Permalink
I’m not sure this argument for physical certificates makes sense. If no physical certificate is available, any purported transfer would necessarily need to be reflected on the books and records of the company. Consequently, the company has the opportunity to assure that the transferee agrees in writing to transfer restrictions and the like. A physical certificate suggests to the layman that the certificate can simply be handed over for consideration without involvement of the company like any bearer instrument.
11/25/2012 | 8:28 am Permalink
I disagree with your analysis for the following reasons:
1. The idea that the company can, in a straightforward fashion, get the transferee to agree to transfer restrictions that s/he was not previously aware of strikes me as naive. A purchaser who did not know of the restrictions (let’s say, was duped by the seller) might become quite unhappy and cause legal problems for both the seller and the LLC upon learning about the restrictions.
2. The last sentence of your comment appears to miss a salient point: A restrictive legend on the certificate typically will summarize the nature of the restrictions and will state that the agreement specifying the restrictions may be examined at the corporation’s principal office. The purchaser, thus, is on notice that s/he needs to come to the corporation’s office to fully understand what s/he has purchased. In my opinion, no prudent purchaser would ignore that notice.
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