A Brief Introduction About the Membership Interest Purchase Agreement
When a partner in a private limited liability company wants to transfer the ownership interests to a third party, then an LLC membership interest purchase agreement is required. These agreements are required in case of a private limited liability company as selling or gifting, unlike shares of stock in an organization, is not possible. This transfer, however, is possible if the other partners of the private limited liability company agree to it, and it is permissible by state laws to have full-partner substitutions.
In certain situations, while the transfer of ownership is allowed, the new partner does not have any operating rights. The partner would only be allowed to participate in the share of profits and losses. A sales agreement has to be drafted between the buyer and seller for receiving a share of the company.
If there is no operating agreement regarding buying and selling of shares in your LLC or if the other members oppose this transfer, then an LLC statute in the state where the LLC is registered needs to be consulted.
Who Takes the Membership Interest Purchase Agreement – People Involved
If you are a member of a private limited liability company wanting to transfer your shares, then you would need this agreement. This agreement has a single buyer and seller. The parties to this agreement include the partner of the private limited liability company and the third party who is buying the share. The consent of the other members is required.
Purpose of the Membership Interest Purchase Agreement – Why Do You Need It?
If you are a member of a private Limited Liability Company (LLC), you cannot sell or gift your membership, unlike shares of stock in a company. The other members of the partnership might have an objection to your selling your membership as they might have problems with the new owner.
The new partner might not get along with the existing partners and might get into arguments with the existing partners regarding the operation of the partnership or about profit-sharing as compared to the capital contributions of each partner. So, after verification of credentials of the new partner, transfer of interest can be made through an LLC purchase and sale agreement.
Contents of the Membership Interest Purchase Agreement – Inclusions
The agreement must be comprehensive and include all the clauses to ensure that the buyer of the membership interest faces no problems after the transfer of membership.
The agreement should include the following:
- The parties to the agreement, the name of the seller and buyer
- The complete address of the LLC and the address of the buyer
- The effective date of the agreement
- The nature of the purchase being made by the buyer
- The details about the closing
- Representations and warranties by the LLC
- A declaration that there are no lawsuits, investigations or proceedings pending
- Financial status: An audited book of accounts needs to be provided, and the LLC must declare that it has no mortgages or other liabilities
How to Draft the Membership Interest Purchase Agreement – Points to Consider While Preparing the Agreement
You can use an LLC membership interest purchase agreement form for drafting the agreement.
Here are the points to consider while drafting the agreement:
- The parties to the agreement and their relationship
- Communication address of both parties
- The consideration for the transfer
- The rights of the buyer
- There are no other agreements apart from this agreement with the buyer of the membership interest
- The representations and warranties by the LLC firm where the membership interest transfer is taking place
- Terms of the transfer: What will be the rights and liabilities of the buyer
- Percentage interest of the buyer
- Space for signatures of parties
- The financial status of the LLC
- Record of any legal proceedings or lawsuits against the LLC
When it comes to this agreement, the price at which the transfer of membership interest is taking place should be negotiated by both parties. The price would depend on whether the buyer would be entitled to just profit sharing or be involved in the LLC’s operational aspects.
Benefits & Drawbacks of the Membership Interest Purchase Agreement
The benefits of this agreement are:
- Protection of interest: The interest of both the buyer and the seller in the agreement are protected.
- Buyer’s experience: The buyer brings varied experience to the company, and this would generate more business.
- Termination of partnership: If Termination of partnership is found that the new partner has breached a clause in the contract, his or her contract with the partnership would be immediately terminated
The drawbacks of this agreement are:
- Opposition from members: The transfer of membership interest can only take place when the other members approve of it.
- Risk of disputes: There is a risk that while the buyer might be approved based on credentials, after becoming a partner, there may be disagreements on every important issue
What Happens in Case of Violation?
When there is a violation of any clause of the agreement by either party, the first step would be to discuss the problem with the offending party and try to come to an amicable solution. The first step would be sending a notice to the party violating the agreement followed by legal action.
If the new partner is causing loss of revenue with constant disagreements, then he or she would have to not only compensate the company for losses and reimburse legal charges.
If the new partner finds that there has been some deviation in the share of profits promised in the agreement, then he or she can take the LLC to court.
Remedies of violation of agreements(1) are time-consuming and expensive, and therefore, should be avoided.
Whether you are interested in purchasing the membership interest in a limited liability company or selling your share, a membership interest purchase agreement is extremely important. It will ensure that you not only get the right price for your share, but the buyer will enjoy a fair share of profits.