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Ask a Lawyer -- LLCs
LLC Question 136
Question:
I am 50% owner in a California LLC in its first year of operation, which was formed using the MedLawPlus.com standard Operating Agreement form. I have made 100% of the actual capital contributions (although the operating agreement states my partner, also 50% owner, has invested 50% of the capital contributions, which total $100, or $50 from each partner). I have developed the name, logo, and marketing for the business. I am interested in taking over the other 50% of the business from my partner, so that I own 100% of the business. This business has thus far produced no revenues, but future business development channels are solely mine, so I would like to obtain full ownership of the company prior to developing business. I think my partner will be amenable to relinquishing his share of the company, since it is currently not producing income. How can I best document the transfer of ownership of his 50% to me? Do I need to have the documentation of that transfer notarized? Since the Operating Agreement was never filed with the state of California, as it is not required, do I need to file anything with the state documenting the change in ownership share? Do I also need to document his initial $50 capital contribution (which was never actually made) for shares and a subsequent payment to him for $50 to "purchase" his shares. I just want to be sure that, in the event the company is successful, that I insulate myself from future claims from my former partner. Thank you very much in advance for your help.
Response: >>I just want to be sure that, in the event the company is successful, that I insulate myself from future claims from my former partner.<<
The only way you can receive assurance of "protection" is to hire a local attorney to advise you. MedLawPlus.com® forms come on an "as is" basis with no warranties or guaranties. Same goes for responses in the "Ask A Lawyer" section of this web site. The following comments are not meant as legal advice. Take them for what they are worth.
Essentially you are describing withdrawal of the other member from your LLC. Two options are available: (a) member #1 purchases the ownership interest of member #2 and (b) member #2 withdraws pursuant to the provisions of the LLC operating agreement. If you are buying the other member out, agree on an amount and put it in writing (i.e., $50). Even $1 (nominal consideration) would be sufficient as contractual consideration. MedLawPlus.com® does not sell a specific form for the sale of LLC membership interests but the asset sales agreement could be modified for this use.
As to the second option, start with the operating agreement. The standard MedLawPlus.com® LLC operating agreement comes with terms selected by the user for withdrawal of a member (although users can opt out of this section of the agreement). Check to see whether your agreement provides what amount the withdrawing member is to receive for his her ownership interest. Again, put something together in writing indicating that the member is withdrawing and what the withdrawing member shall be receiving in exchange for his or her membership interest. Here are some thoughts on withdrawal from a California LLC when the operating agreement either does not exist or does not deal with member withdrawal.
Do you need to file anything with the state to indicate that a member has withdrawn? I think not initially; however, on the next annual report you would indicate the change in members. But no need to take my word on it, here is the contract information for the California Secretary of State's office.
Submitted: 09/26/2007; Billy, California
Response: 09/26/2007; JJR
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