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Ask a Lawyer -- LLCs
LLC Question 159
Question:
One member of young California LLC wish to withdraw from the company and to give up his membership units. The rest of the company members wish to organize fund and transfer leaving member membership units to this fund. Units in this fund will be reserved for the future members, employers or investors.
How do we go about this situation? How do we formalize it?
Response: I don't really see the purpose to "reserving" LLC membership units for prospective new members. What you describe, if we were talking about a corporation, would be treasury stock or authorized but unissued shares. LLCs do not operate in the same fashion per se. The articles of incorporation of a corporation require the organizers to name the number of shares the corporation is authorized to issue and their par value. To avoid having to go back and amend the articles of incorporation with the state each time the corporation wishes to issue new shares of stock, it is common practice for corporation organizers to set authorized shares at a level larger than they intend to initially issue upon obtaining the corporation's charter.
My suggestion is as follows. The members who wish to continue in the LLC agree on a new LLC operating agreement that apportions the LLC units among existing members. Next, the members agree on the ownership percentage to be offered to new members and, if possible, the price. You could memorialize this understanding in the minutes of LLC members meeting. How does that work out to unit numbers? These can be changed when the LLC operating agreement is revised upon admission of the new members. For instance, let's assume you currently have 4 members with 1000 total LLC membership units divided between you. If equal ownership, each member owns 250 units. Let's say you want to add a new member who will also have equal ownership. Then the number of units is reapportioned by amending the LLC operating agreement so that the 5 members each owns 200 units of the 1000 total. The total number of units is of little consequence. Where voting rights and shares of profits and losses are tied to ownership percentage (as is most commonly the case), the only number that really matters is percentage of ownership in the LLC.
Submitted: 01/02/2008; Irina, CA
Response: 01/02/2008; JJR
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