When one forms a limited liability company (LLC) without a lawyer, there is a high likelihood that LLC membership interests will not be issued properly. This post describes how to issue LLC membership interests. It is adapted from a Quora question about LLC membership vesting that I answered.
Properly-Issued LLC Membership Interests
If LLC membership interests are issued properly, one would expect to see several things.
First, there should be a written, signed Operating Agreement that specifies the LLC membership interests. These interests may be expressed as percentages, such as two members, each with a 50% membership interest. Alternatively, these interests may be expressed as units, similar to shares in a corporation.
In addition, the Operating Agreement should specify the consideration to be paid for the LLC membership interests. Typically the consideration is cash. However, the consideration may be something else, such as a transfer of assets or provision of services. The choices depend on the Operating Agreement and applicable state laws.
Payment of Consideration for LLC Membership Interests
Second, one would expect to see evidence that the member actually paid the specified consideration.
If the consideration is cash, there should be a record of the specified amount having been deposited into the LLC’s bank account. For non-cash consideration, there should be a written agreement between the member and the LLC by which the member provides, or is obligated to provide, the specified consideration.
Record-Keeping for LLC Membership Interests
Third, the LLC should have a record book that holds the LLC’s important documents. To start, these include the organizational document filed with the Secretary of State and the Operating Agreement. In addition, the following documents pertaining to LLC membership interests should be included.
- A membership transfer ledger (and maybe even membership certificates) evidencing the various LLC membership interests.
- A balance sheet showing each member’s capital account. This consists of the capital contribution, with subsequent increases and decreases pertaining to allocations and distributions.
Avoiding “Alter Ego” Problems
Why should you care about issuing LLC membership interests properly? The single greatest reason to to avoid unlimited personal liability that might arise under an “alter ego” analysis.
Bottom line: If you are going to form a limited liability company, be sure to issue LLC membership interests correctly.
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.