The Company Agreement Explained: Involuntary Transfers v. Voluntary Transfers
July 25, 2014 | By Vela Wood
We often get asked by clients about what happens when members of LLCs die, get divorced, want to sell their interest to another member or third party, etc. All of these transfers fall into two categories: involuntary transfers and voluntary transfers, and the company agreement of the LLC should address both involuntary transfers and voluntary transfers.
“Transfer” can mean a sale, gift, assignment, donation, or any other form of transfer. Make sure “transfer” is defined in your company agreement so there is no ambiguity about what it means.
What’s the Difference?
The difference between an involuntary transfer and voluntary transfer is exactly what you would guess – an involuntary transfer is a transfer that is done without a member’s will or control, and a voluntary transfer is a transfer that is done under a member’s control.
Below are a few examples of involuntary and voluntary transfers:
- Termination of a marital relationship
- Death of a member
- Bankruptcy of a member
- Transfer to an existing member of the LLC
- Transfer to a third party
Why Does it Need to be Addressed in the Company Agreement?
How would you feel if your business partner decided he wanted to sell his interest in the LLC to a third party who you believed wasn’t a good fit? Additionally, because Texas is a community property state, a married member’s interest is owned 50/50 between husband and wife. If a divorce occurs, the other spouse owns half of your interest even though he or she isn’t a member of the LLC. Both of these situations, along with others, can occur if you don’t have a company agreement in place.
The company agreement should address who has the first right to purchase interests in the event the LLC or another member wants to sell their interest. For example, should the existing members have the right to approve the transfer, and do you want the company to have the first right to purchase the interest or do you want the existing members to have the first right? The company agreement should also address what happens when a member gets divorced, when a member dies, and when a member files for bankruptcy. LLCs are very flexible and allow members to decide the procedures that should be put in place when these situations arise.
It is also important to include how the terms of the transfer are going to be determined. For instance, how will the purchase price be determined and how will the purchase price be paid (i.e. fair market value in 24 equal monthly installments, etc.)? Will you need or want to hire an appraiser if the parties can’t decide on the appropriate price? If so, how will the appraiser be chosen?
There are so many options to consider when determining what “transfer” provisions to include in an LLC company agreement. Be sure to consult with an attorney when you are ready to draft a company agreement for your LLC.
Posted in Company Agreement Series
Vela | Wood is a boutique corporate law firm that focuses on small businesses, entrepreneurs, and startups.