LLC Membership Interest Purchase Agreement

What is a membership interest purchase agreement?

A membership interest purchase agreement is a legally binding contract through which a current member of a limited liability company transfers their membership interest to a third party. In other words, this agreement is being used to establish terms and conditions for a sale-purchase of the LLC’s membership interest between two parties.

An LLC interest purchase agreement is a simple document that includes the following information related to the transfer:

• details of the parties involved;
• name and address of the LLC;
• payment arrangement (i.e., purchase price, payment schedule, and method);
• mutual representations and warranties;
• confidentiality obligation clause; and
• general provisions (e.g., applicable law, severability),

The parties involved in this agreement are the seller and buyer. A seller is always a person who owns membership interest in the LLC. A seller’s membership interest could be confirmed by the LLC’s operating agreement or articles of organization. A buyer is a person who is willing to purchase membership interest and could be a business, legal entity, or individual.

This template could be used to transfer a membership interest only in the LLC that is registered within the United States and aligns with applicable state LLC statutes, Uniform Commercial Code and general principles of contract law.

Why do you need to make a purchase of the LLC’s interest in a written format?

Even where no state statute requires a written document for this specific transaction, having a professionally drafted document template is a must because:

• It defines the scope of transfer. Under most states’ default rule, the standard purchase of the interest transfer only transfers economic rights, excluding the right to vote or participate in the decision-making process. A simple written document is the only tool to override the default statutory rule and clearly stipulate which rights the seller intends to transfer to the buyer.
• It records real parties’ intentions. A written template documents what the parties actually agreed to sell, rather than what they think of.
• It clarifies the main terms of the deal. The written document helps parties to reach certainty regarding the final price, scope of transfer, closing date, list of warranties and representations, etc.
• It acts as a sole evidence in case of a dispute. This is especially important if the interest has been transferred to the seller in violation of certain legal warranties or representations.

Which document do I need to purchase an interest in the LLC?

Whether you are a first-time buyer or an experienced investor, selecting the right document has significant legal consequences for the whole transaction. It is common to confuse interest purchase, stock purchase, and business purchase agreement, as all of them make you an owner of a company or business to some extent.

To sum up, if you are looking to buy the whole business, rather than a fraction of membership, you may need a business purchase agreement template. If you are acquiring shares of stock in a s-corporation instead of LLC membership interest, a stock purchase agreement template should be used instead.

Does buying membership interest make you a voting member in the LLC?

Acquisition of the interest in the LLC is not equivalent to acquisition of the member’s rights in the LLC, such as voting or management rights. This is a default rule that applies across most of all U.S. states’ LLC statutes.

By virtue of the present transaction, the buyer automatically acquires only economic rights, such as the right to a share in the profit. However, to become a full member with voting rights, additional formalities should be done, depending on the state, for example:

• upon the vote or consent of all of the members (§ 18-702(a) 6 Del. C. );
• upon the vote or written consent of at least a majority in interest of the members (18-704(a) Delaware Limited Liability Company Act);
• upon the update of the existing operating agreement (§ 603 (4) of LLC Law, Chapter 34, Article 3)

How to draft an LLC membership purchase agreement template?

Drafting a membership purchase agreement template might be a daunting task even for lawyers. All the provisions in the contract should be clear, precise, and straight to the point.

The law does not define the exact list of clauses a member interest purchase agreement shall have. Though inclusion of certain clauses is essential for a legal document to be complete and legally binding. Below we made a list of key elements you have to include in your sale-purchase agreement:

Details of the Parties

The text of every LLC membership purchase agreement should include:

• full legal names, addresses, and contact details of both seller and buyer;
• full name, address, and state where the LLC was registered;
• reference to the existing LLC operating agreement, if any;
• the date of signing or effective date; and
• parties’ signatures at the end of the document.

Details of the Membership Interest

Every membership interest purchase agreement shall define what is being sold, in particular:

• specify the total percentage the seller owns in the LLC;
• clarify whether the full membership interest is being transferred or only part of it (e.g., a seller owns 50% in the LLC but wishes to transfer only 20% from its whole membership interest).

If a seller transfers their whole interest in the LLC, in that case the seller ceases to be the LLC’s member. Which is not the case if a seller makes a partial transfer of their interest.

Purchase Price and Closing Date

The text of every LLC membership purchase agreement shall include a total purchase price the buyer shall pay. Apart from that, the contract should also define:

• applicable payment model (e.g., full sum paid at once on a specific date or payment schedule);
• applicable payment methods (e.g., cash, bank transfer);
• closing date (i.e., the date by which the buyer shall finalize all payment obligations in full before the seller).

A solid member interest purchase agreement should also address the exact venue, date, and time when the finalization of the deal takes place, also known as the closing. It is common to make the closing remotely by exchanging electronically signed documents between the parties.

Make these steps before the closing date to save your investment

Once the draft deal is on your table, do not rush to sign it. Instead, make the following preliminary checks and compliance verifications:

Step 1. Legal warranties

The section related to warranties is the main legal foundation of the deal, as it works as an actual risk-allocation engine—this is where the parties formally divide up who bears the risk of what turning out to be untrue.

A representation is a statement of fact made by one party to another. For example, a seller represents that he is an owner of a membership interest in the LLC. On the other hand, a warranty is a promise that certain conditions are or will remain true. For example, a seller warrants that there are no current disputes involving a seller’s membership interest in the LLC. The most typical warranties and representations are the following:

However, warranties only have teeth through the indemnification mechanism built around them. The final document must define how exactly the breach should be remedied — the clause defining how a breach actually gets remedied: a survival period after closing during which a claim can be brought, a materiality or “knowledge” qualifier limiting what counts as a breach, and often a cap and minimum threshold before a claim becomes actionable at all. A warranty with no indemnification structure behind it is a statement, not a real protection.

Step 2. Title

It is not enough to rely solely upon the buyer’s warranties regarding the title. It is better to run a direct compliance check using the UCC state lien search. If there is any security interest over the title that is properly registered, it means that it will survive a sale (article 9 of the UCC). For you, as a new owner, it means that you acquire the interest along with the third party’s right over it from the very beginning.

Step 3. Profits

It is always worth hiring a professional accountant and audit to investigate thoroughly all profit and loss statements, balance sheets, tax filings, and other financial documentation prior to the closing date. This is your only way to see the real picture and to assess the profitability of the business you acquire the membership in.

Since, in the course of a financial audit, the future buyer and its representative get access to the business’s sensitive information, parties may additionally enter a separate confidentiality agreement prior to sharing any information.

Step 4. Corporate restrictions

If a seller is a party to an existing LLC’s shareholder agreement, there might be certain restrictions in place related to the transfer of shares. For instance, a seller may first seek a prior approval from other LLC members. Or, a seller might be required to offer their shares first to the other members or the LLC before selling to third parties. If a seller fails to comply with any such restriction, the transfer under a membership interest purchase agreement might be considered void. As a result, your rights as a buyer are also under risk. Always ask sellers to present any existing shareholder or LLC’s operating agreement in place to check for any available limitations.

Step 5. Public image

Last but not least, make your own investigation about the LLC you are planning to acquire a membership interest in. If there is some negative information in mass or social media, it may potentially impact the LLC’s public image and, eventually, profits and business in general.

Things to do immediately after the purchase of interest in the LLC

Once the deal is finalized and closed, parties usually think that this is the end. However, completion of important formalities below is essential to ensure the transfer of interest is complete.

Updating the LLC Operating Agreement

Signing a purchase- of-interest agreement does not “oblige” the LLC to recognize the change of the title. The buyer must admit the LLC’s owner records and provisions of the LLC operating agreement to formally be recognized as a member. This also ensures clarity for any future sale-purchase transactions with third parties.

According to the LLC statute of certain states, the buyer is not legally recognized as the LLC’s member until the LLC operating agreement is updated. For example,  under Delaware’s § 18-704(a), an assignee only becomes a full member “as provided in a limited liability company agreement” and upon the required approval — meaning the operating agreement (or a formal amendment to it) is the actual mechanism through which admission legally happens, not the purchase agreement itself.

Signing a non-compete agreement

To protect your new business against competition from its ex-members and key employees from potential solicitation, the second most important step is to sign a general non-compete agreement with the seller.

Seeking tax advice

Whether you are acquiring membership interest in a single-member or multimember LLC, it affects how you should report the received income to the IRS. If you are in doubt, it is better to get a professional’s tac advice.

How to customize a legal document template at Faster Draft?

To get a personalized membership interest purchase agreement, follow a few easy steps below:

1. Click the button “Create Document.”
2. Answer simple questions in the form.
3. Select a document’s format—LLC membership purchase agreement PDF or Word.
4. Make a payment.
5. E-sign, download, print, and use a customized legal document template in minutes.