Membership Interests and Member Contributions

Membership Interests

A member of a Limited Liability Company holds a membership interest, which includes only an economic interest. A membership interest is considered to be personal property and may be freely transferred to either nonmembers or to other members within the Limited Liability Company. Membership interest usually does not include the right to participate in managing the Limited Liability Company. as a result, if a member assigns or sells a membership interest to someone else, that other person usually receives only the right to the share of profits of the assigning member's in the Limited Liability Company. Individuals receiving a membership interest are allowed to participate as voting members or managers unless they are admitted as new members.

State law and a Limited Liability Company’s operating agreement or articles of organization provide conditions under which a person may be admitted as a new member. These conditions may vary. Usually admission of a new member will require the consent of existing members and, in most cases, consent must be unanimous. In some cases the articles of organization will not allow the admission of new members, while in others the beneficiary of a membership interest may be automatically admitted as a new member.

Member Contributions

Members of a Limited Liability Company contribute capital to the company in exchange for membership interest. There is no minimum amount of capital contribution, and members typically contribute cash, property, or services. By default, the total amount of a member's capital contribution to a Limited Liability Company determines the member's voting and financial rights in the LLC. In other words, unless the operating agreement of a Limited Liability Company provides for a different arrangement, its profits and losses are shared proportionally in relation to the members' contributions to the Limited Liability Company. For instance, if a member's capital contributions constitute 40% of a Limited Liability Company’s capital, that member typically has a 40% stake in the Limited Liability Company and has more voting power than a member having only a 20% interest.

In exchange for a membership interest, a member may agree to a future contribution to a Limited Liability Company. Should the member later fail to make the contribution, the Limited Liability Company usually enforces the promise as a contract or it will sell the member's existing interest in order to remedy the failure.

Distributing profits or assets to members are governed by a Limited Liability Company’s operating agreement. In most state the Limited Liability Company laws do not require distributions to members other than when a member withdraws or terminates membership. Members vote to determine all aspects of distributions to members, which includes amount and timing. Because a member's share of any distribution or loss is dependent on the member's share of all capital contributions to a Limited Liability Company, the records of each member’s capital contribution will be maintained by the company.

If you would like more information regarding asset protection, trusts, family limited partnerships or the subject of this article please call or email our office.