Gene had enjoyed his years sharing a real estate business with his friend. The two of them had formed an LLC together right after getting their real estate licenses. Over the years, they had gotten along great and done well. But Gene was frankly ready to move on. He had other things he wanted to do. Gene just wasn’t ready to walk away from his real estate business without some consideration for leaving it behind. Was it something he could sell?
Departing
You may come to the point of no longer wanting to continue your LLC business. Attitudes, interests, and relationships change. You may tire of operating your LLC, or its other members and personnel may tire of you to the point that you’d prefer to withdraw. Even if you don’t want to withdraw, you might come to the point of not being able to continue. Your illness, injury, or slow decline may bring you to the point of work ineffectiveness or even outright disability. The needs of a dependent spouse, parent, child, or other family member may require you to give up your LLC work. You may instead just find better opportunities elsewhere. You may just be one of those special individuals who are great at creating things but not so interested in sustaining things. Don’t hesitate to examine your interests in withdrawing from your LLC. Everything has a season. It may be your season for a change.
Value
Your membership interest in your LLC may have considerable value. Your LLC may have valuable customer or client relationships, valuable contracts with suppliers, and a valuable name, branding, and location, giving the LLC considerable worth as a going concern. While going-concern values are generally significantly higher than liquidation values, your LLC may alternatively have significant real property, tangible personal property, intellectual property, and other intangible but valuable interests and rights. Liquidation of those interests could result in considerable cash payouts to your LLC’s members in a dissolution. Your LLC may alternatively have a history of paying substantial distributions to its members, indicating the value of membership interests. Whatever is the case, you are fully within your rights and interests to determine whether you have something to realize from the sale of your LLC membership interest, once you decide to withdraw from the LLC’s business.
Withdrawal
If you are intent on concluding your relationship with your LLC, you should first determine your opportunity to withdraw and rights on withdrawal. If you’re leaving, you need to know what the LLC may owe you or you may owe the LLC on your departure. As indicated in a chapter above, your LLC’s operating agreement should provide terms and conditions for member withdrawal. Your state’s LLC act should also have detailed provisions regarding rights and obligations on withdrawal. For instance, the LLC would ordinarily owe the withdrawing member any distributions the LLC was to have made before withdrawal but not after withdrawal. Together, your state’s LLC act and your LLC’s operating agreement may provide for the LLC to pay you the fair value of your membership interest based on distributions. Investigate those rights. Your best way to dispose of your LLC membership interest may be withdrawal.
Negotiation
If you intend to withdraw from your LLC but find only limited or unsatisfactory rights to withdraw, without realizing what you believe to be the fair value of your LLC membership interest, then consider negotiating with your LLC’s other members for the sale and transfer of your membership to them. They may be more than willing to eliminate your membership interest and increase their own interests, and to pay you fair value for doing so. If you and your LLC’s other members are too close to one another, too far apart, or otherwise lack the transactional relationship necessary to negotiate a sale and transfer, then consider involving an attorney, business broker, or other mediator to assist you. Negotiated agreements can solve a lot of issues that laws and contract rights cannot.
Assignment
The Uniform LLC Act and state LLC acts patterned after it generally permit the assignment of an LLC membership interest unless the operating agreement provides otherwise. Assignment means that the LLC member remains a member but gives up the right to distributions in favor of the person to whom the member assigns the interest. The membership doesn’t change, only the person to whom the LLC direct’s the member’s distributions. An assignment is thus like a sale of the beneficial interest as to the distribution rights but unlike a sale as to participation in the LLC’s affairs. Only the member participates, not the assignee. The LLC member assigning the interest should receive consideration from the assignee in return. That consideration could be a cash payment, loan, relief from a loan, or relief from another obligation the member owes the person to whom the member assigned the LLC interest. If you need or want to realize value from your LLC membership, assignment may be possible, appropriate, and beneficial. If so, then acquire and sign an assignment agreement with your assignee, stating your relative rights and responsibilities.
Substitution
Assigning your LLC interest to another person does not make that other person a member. But your state’s LLC act and your LLC’s operating agreement may permit the assignee to substitute in for you as a member. Your state’s LLC act and your LLC’s operating agreement will likely require consent of either all members or a majority of members or membership interests, for the substitution of your assignee into your place as a member. You likely can’t force your LLC’s other members to accept a new member as a substitute for you. But find out the other members’ preferences. They may be glad to work with a new member who brings new ideas to the LLC along with fresh skills and different experience. Once they approve the substitution, the substitute gains all the rights and privileges to participate in the LLC’s affairs as other members hold.
Transfer
Your state’s LLC act and your LLC’s operating agreement may alternatively permit you to transfer your membership interest to another person in a direct sale. As in the case of substitution after assignment, that sale and transfer may, though, depend on approval of all other LLC members or a majority of members or membership interests. Check your LLC’s operating agreement. And no matter what the operating agreement states, check with your LLC’s other members. They may be willing to waive certain terms and conditions of the operating agreement, if your state’s LLC act permits them to do so. If you get your transfer approved, the buyer of your membership interest should pay you the negotiated sale price, whether in cash up front, cash over time, services or goods in kind, or release of other debts or obligations you owe the buyer.
Dissolution
Dissolution, treated in greater depth in the next chapter, may be another alternative for you to realize at least some of the value of your membership interest, if you are unable to sell the membership interest itself. You may be unable to find a qualified buyer with the right license to take over your PLLC. You may be unable to find any buyer at all with an interest in continuing your LLC’s business. But your LLC may have valuable property and rights that it can sell in a dissolution. Dissolution means ending the LLC. Dissolution requires paying all LLC debts out of any LLC assets. But if cash remains after doing so, then the dissolving LLC’s members should receive their proportionate percentages of that cash, representing their membership interests. Consider dissolution if you can’t sell, don’t wish to continue, but want to realize the value of assets net of debts.
Key Points
You may be able to realize value if you depart from your LLC.
You may have distribution rights on your LLC withdrawal.
Consider negotiating your withdrawal for value if having no rights.
Consider assigning your LLC membership rights for value.
Your assignee may be able to substitute in for your membership.
You may have the right to sell and transfer your membership.
If unable to sell, consider dissolution at liquidation value.