Sale and Assignment of LLC Membership Interests

by David J. Willis J.D., LL.M.


This article addresses legal points to consider when conveying a membership interest in a limited liability company from one individual to another. It does not address the initial issuance of such interests at the time the LLC is formed, nor sales of membership interests by an existing LLC to incoming members. Attached at the end of the article is a checklist of information and documents that are needed in order to correctly prepare a sale and assignment of LLC membership interest—which we will refer to in this article simply as the “assignment.”

Additionally, this article addresses absolute assignments (full and final transfers) rather than collateral assignments (made only as security for a loan).

Assignments may follow the execution of a letter of intent which provides for a due-diligence period. This article does not cover the contents of such an LOI but does address issues that should be considered by a prospective assignee in conducting due diligence.

After covering definitions and applicable law, we will turn to principal drafting points that should be considered in preparing an assignment of LLC membership interest.


Relevant Statutory Definitions

The law applicable to transfers of interest in a Texas LLC is found in the Business Organizations Code (“BOC”) which includes the following relevant definitions in Section 1.002:

(7) “Certificated ownership interest” means an ownership interest of a domestic entity represented by a certificate issued in bearer or registered form.

(32) “Fundamental business transaction” means a merger, interest exchange, conversion, or sale of all or substantially all of an entity’s assets.

(35)(A) “Governing authority” means a person or group of persons who are entitled to manage and direct the affairs of an entity under this code and the governing documents of the entity, except that if the governing documents of the entity or this code divide the authority to manage and direct the affairs of the entity among different persons or groups of persons according to different matters, “governing authority” means the person or group of persons entitled to manage and direct the affairs of the entity with respect to a matter under the governing documents of the entity or this code.

(41) “Interest exchange” means the acquisition of an ownership or membership interest in a domestic entity as provided by Subchapter B, Chapter 10. The term does not include a merger or conversion.

(46) “Limited liability company” means an entity governed as a limited liability company under Title 3 or 7. The term includes a professional limited liability company.

(53) “Member” means: (A) in the case of a limited liability company, a person who has become, and has not ceased to be, a member in the limited liability company as provided by its governing documents or this code. . . .

(54) “Membership interest” means a member’s interest in an entity. With respect to a limited liability company, the term includes a member’s share of profits and losses or similar items and the right to receive distributions, but does not include a member’s right to participate in management.

(64) “Ownership interest” means an owner’s interest in an entity. The term includes the owner’s share of profits and losses or similar items and the right to receive distributions. The term does not include an owner’s right to participate in management.

(69-b) “Person” means an individual or a corporation, partnership, limited liability company, business trust, trust, association, or other organization, estate, government or governmental subdivision or agency, or other legal entity, or a protected series or registered series of a domestic limited liability company or foreign entity.

(87) “Uncertificated ownership interest” means an ownership interest in a domestic entity that is not represented by an instrument and is transferred by: (A) amendment of the governing documents of the entity; or (B) registration on books maintained by or on behalf of the entity for the purpose of registering transfers of ownership interests.

A well-drafted assignment of LLC membership interest will be mindful of and consistent with these statutory terms.

Statute Authorizing Membership Assignments

Foundational to the idea of a sale and assignment of LLC membership interest is the legal authority to enter into such a transaction in the first place. This is found in BOC Section 101.108:


(a) A membership interest in a limited liability company may be wholly or partly assigned.

(b) An assignment of a membership interest in a limited liability company:
(1) is not an event requiring the winding up of the company; and (2) does not entitle the assignee to: (A) participate in the management and affairs of the company; (B) become a member of the company; or (C) exercise any rights of a member of the company.

Consent by other members is required. BOC Section 101.103(s) states that a “person who, after the formation of a limited liability company, acquires directly or is assigned a membership interest in the company or is admitted as a member of the company without acquiring a membership interest becomes a member of the company on approval or consent of all of the company’s members.” BOC Section 101.105 states that a “limited liability company, after the formation of the company, may: (1) issue membership interests in the company to any person with the approval of all of the members of the company. . . .”

An additional consent requirement is found in BOC Section 101.356(c) which provides that, for the most part, “a fundamental business transaction of a limited liability company, or an action that would make it impossible for a limited liability company to carry out the ordinary business of the company, must be approved by the affirmative vote of the majority of all of the company’s members.”

Accordingly, by virtue of all of the above, it is advisable to accompany an assignment of membership interest with a special meeting of members that approves and ratifies the change. All affected parties should sign the minutes.

What category of property is an LLC membership interest?

BOC Section 101.106 addresses the nature of an LLC membership interest:

(a) A membership interest in a limited liability company is personal property.

(a-1) A membership interest may be community property under applicable law.

(a-2) A member’s right to participate in the management and conduct of the business of the limited liability company is not community property.

(b) A member of a limited liability company or an assignee of a membership interest in a limited liability company does not have an interest in any specific property of the company.

The characterization of an LLC membership interest as personal property is important because it also signifies what it is not. For instance, such an interest is not a negotiable instrument subject to the Uniform Commercial Code (found in Texas Business & Commerce Code Section 3.201 et seq.); neither is an LLC membership considered to be a security subject to securities laws: “An interest in a partnership or limited liability company is not a security unless it is dealt in or traded on securities exchanges or in securities markets, [and the company agreement] expressly provide[s] that it is a security . . . or it is an investment company security.” Tex. Bus. & Com. Code Sec. 8.103(c).

If the company agreement provides a membership interest will be a security, then the membership interest would be subject to security-interest perfection requirements of UCC Chapter 9. A security agreement would then be one of the core documents included in the transfer.

The foregoing applies regardless of whether the membership interest is considered certificated or uncertificated.

Non-Member Spouses

Personal property in Texas is presumed to be community property. A frequent error in transfers of LLC membership interest is failure to secure the signature of the assignor’s non-member spouse. The result is that the entire interest has not been conveyed, at least not in Texas. This is no different than if a grantee in a deed accepts the conveyance without requiring execution by the grantor’s spouse; since community property is presumed, the transfer is likely incomplete if the spouse does not sign off.

To say that omitting the signature of a spouse can cause disputes to arise later would be an understatement. As is the case in real estate practice, it is common for legal clients to argue that their spouse should not be required to sign the conveyance because the property transferred is a business rather than a homestead asset. This is simply incorrect.

Even though BOC Section 101.108 provides that a non-member spouse of an assignee may not assert control over the company, the potential for awkward and potentially disastrous disruption remains. In anticipation of this or any other dispute, both a well-drafted company agreement and an assignment of membership interest will require that all parties participate in mandatory mediation prior to the filing of any legal action.

Qualifications for LLC Membership

The BOC addresses qualifications and requirements for LLC membership in Section 101.102:

(a) A person may be a member of or acquire a membership interest in a limited liability company unless the person lacks capacity apart from this code.

(b) A person is not required, as a condition to becoming a member of or acquiring a membership interest in a limited liability company, to:

(1) make a contribution to the company;
(2) otherwise pay cash or transfer property to the company; or

(3) assume an obligation to make a contribution or otherwise pay cash or transfer property to the company.

(c) If one or more persons own a membership interest in a limited liability company, the company agreement may provide for a person to be admitted to the company as a member without acquiring a membership interest in the company.

Rights and Duties of an Assignee


(a) A person who is assigned a membership interest in a limited liability company is entitled to:

(1) receive any allocation of income, gain, loss, deduction, credit, or a similar item that the assignor is entitled to receive to the extent the allocation of the item is assigned;
(2) receive any distribution the assignor is entitled to receive to the extent the distribution is assigned;
(3) require, for any proper purpose, reasonable information or a reasonable account of the transactions of the company; and
(4) make, for any proper purpose, reasonable inspections of the books and records of the company.

(b) An assignee of a membership interest in a limited liability company is entitled to become a member of the company on the approval of all of the company’s members.

(c) An assignee of a membership interest in a limited liability company is not liable as a member of the company until the assignee becomes a member of the company.


(a) An assignee of a membership interest in a limited liability company, after becoming a member of the company, is:

(1) entitled, to the extent assigned, to the same rights and powers granted or provided to a member of the company by the company agreement or this code;
(2) subject to the same restrictions and liabilities placed or imposed on a member of the company by the company agreement or this code; and
(3) except as provided by Subsection (b), liable for the assignor’s obligation to make contributions to the company.

(b) An assignee of a membership interest in a limited liability company, after becoming a member of the company, is not obligated for a liability of the assignor that:

(1) the assignee did not have knowledge of on the date the assignee became a member of the company; and
(2) could not be ascertained from the company agreement.

It is important to note that these statutory rights and duties are subject to “restrictions and liabilities” that may be imposed by the company agreement. For this and other reasons, it is important that an assignment document include a covenant that the new assignee agrees with and will abide by the company agreement. Since Texas is a community property state, the spouse of a new assignee should also be asked to sign off on this commitment. The best practice is to secure the signatures of both the new assignee and any non-member spouse on the company agreement itself.

Re-Allocation of Interests and Effective Date of the Assignment

An assignment of membership interest necessarily involves a re-allocation of percentage interests among named members. BOC Section 101.201 addresses this issue, stating “The profits and losses of a limited liability company shall be allocated to each member of the company on the basis of the agreed value of the contributions made by each member, as stated in the company’s records. . . .” Accordingly, attention should be given to the effective date of the assignment, since the transfer may have accounting consequences. It is advisable to select an effective date or record date for the assignment that facilitates easier calculation of profits and losses, or at least does not unduly complicate that calculation.

As previously noted, a special meeting of members is an important companion document to the assignment. The meeting, signed by all affected parties, can not only approve the assignment but include mention of issues such as record date, clearly describe the new allocation of membership percentages, and authorize issuance of new membership certificates.


Basic Due Diligence by the Assignee

What items should the assignee investigate as part of the due diligence process? The following is a partial list:

(1) Valuation. Most small-business assignments of LLC membership interest occur among insiders who are already acquainted with the company’s assets, liabilities, management, and operations. For potential assignees who do not fall in this category, the question of valuation arises—not just valuation of the membership interest itself but valuation of the LLC as a whole, since the two are effectively inseparable.

A separate lengthy article could be written on how to evaluate and appraise a business; suffice it to say that there should be some rational basis for the asking price that can be independently confirmed by looking at the company’s finances and assets. Certain numbers will be hard (bank account balances) and others soft (marketing strategy and value of the brand). If assets include real properties, a critical evaluation of value may include appraisals. It is impressive if a real estate investment company has an inventory of 20 rental properties; it is less so if half the properties are unrented, down for maintenance, or underwater.

(2) Good Standing. It is important to verify that the LLC and the assignor (if a registered entity) are in good standing with the secretary of state and the Texas comptroller. If not, they do not have the legal capacity to do business, which could potentially make execution of an LLC membership assignment invalid.

(3) Core LLC Documents. A prospective assignee will want to see core documents including the certificate of formation; the certificate of filing (the secretary of state’s approval); the minutes of the first organizational meeting of members along with subsequent minutes of special meetings (if any) and annual meetings; company resolutions or grants of authority; the company agreement, as currently amended or restated; and any membership certificates that may have been issued (or at least a record of same).

Also: where are the official LLC records kept? Who is responsible for keeping them, and is access readily available? Is there a company book, i.e., a binder containing these? Failure of an LLC to keep organized and complete records is a warning sign for a potential assignee. This is true regardless of and aside from any statutory requirements for LLC record keeping.

A vital object of assignee’s investigation should be the company agreement. The company agreement is essentially a partnership agreement among members, so it will directly bind a prospective assignee. Is it valid? Is it a legal document of substance or is it a three-page printout from the internet? Are provisions of the company agreement compatible with the intentions and goals of the assignee? What limitations does the company agreement impose (for example, restrictions on transfer of membership interests)? Can one easily re-sell the membership interest?

(4) Managers. It is operationally important to determine if the LLC is member-managed or manager-managed and, if the latter, to identity of the managers. Can the assignee work with these persons? Are they professional and competent? What is their track record?

(5) Member List. LLCs are required to keep current lists of members, their respective interests in the company, and a list of all contributions to the company. BOC Sections 101.501(a)(1)-(7). Fellow members of a smaller LLC are effectively your partners in the enterprise. It is good to know who they are.

(6) Contracts and Agreements with Third Parties. Any agreements with third parties that affect
control, management, or operation of the LLC should be examined. Examples would be contracts with vendors or a property management agreement with a third-party management company. Is the LLC currently part of a joint venture with a different group of investors?

(7) Voting Agreements. These may or may not exist. Any one or more of the members may enter into voting agreements (including but not limited to proxies and pledges) that can affect control of the entity.

(8) Federal Tax Returns. Tax returns are important to verify how the LLC is taxed and how ownership is reported to the IRS. Tax returns and LLC records should be consistent in this respect. It is a good idea for a prospective assignee to have a CPA review the tax returns.

(9) Texas Annual Filings. A prospective assignee should review the franchise tax returns and public information reports (PIRs) that must be annually filed with the comptroller’s office. Do these accurately reflect the LLC’s affairs? Are they diligently prepared and timely filed?

(10) Transactional Records. What property does the LLC own? Are warranty deeds in the name of the LLC duly recorded in the real property records? How are properties managed and who is responsible for doing so? What do the files and records look like—are they orderly or are they a mess? And what about completeness? Do files for rental properties contain all essential documents like warranty deeds, notes and loan agreements, deeds of trust, leases, appraisals, maintenance records, and so on? A specific person should be responsible for keeping such records.

(11) Salaries, Draws, and Distributions. These should be examined to discover if there is a pattern of excessive or erratic compensation to managers or distributions to members. Is there a coherent schedule or plan? Are measures in place to insure that the LLC maintains sufficient working capital to fund existing and planned operations?

(12) Bank and Depository Accounts. Current and recent copies of account statements should be examined. Look for any unusual withdrawals or capital flows. Is the LLC adequately capitalized? Does it have an adequate capital reserve? Inadequate capitalization is the number one cause of small business failure.

(13) Records of Pending, Prospective, and Resolved Legal Actions. Is the LLC being sued? Has it been sued in the past? Do the managers have a history of shoddy or deceptive dealings? Is the LLC continually receiving DTPA notice letters from attorneys? Default letters from HOAs or appraisal districts? Does the company charter get periodically revoked (and then have to be reinstated) because the LLC fails to timely file its franchise tax return or PIR? Consider meeting with the LLC’s attorney if there is a lawsuit pending. Require that confidentiality be waived in order to get a frank assessment of the situation.

(14) Best Practices Generally. It is important to ascertain whether or not the LLC is run with diligence, integrity, and in compliance with applicable law. Does the LLC have a regular business attorney and CPA to advise the managers? Or do the managers wing it on a DIY basis most of the time? What is the company culture with regard to best practices?

(15) Reputational Evidence. A prospective assignee may want to do some digging in order to evaluate the business and personal reputations of the managers and members. What is their professional history? Personal matters are also relevant: are any of them getting a divorce from a spouse who might turn into a hostile party? Was one of them just expelled from the country club for non-payment of dues? Do an internet search at minimum but also consider using a private investigator (These are not just for the movies). It is prudent to understand with whom you will be doing business.

(16) Company Performance. How have the LLC’s investments fared, particularly over the last couple of years? What do the company accounts show and are these numbers verifiable? Try to reduce the results to line graphs for income and costs. Which way are these factors trending?

(17) Business Plan. Do the managers and members have specific goals or is their strategy more built around targets of investment opportunity? Is their plan realistic or pie-in-the-sky? What will the company likely look like in three years? Five years?

The importance of thorough due diligence by a prospective assignee cannot be understated. Knowledge, as they say, is power. If one must sign a confidentiality/non-disclosure agreement in order to get relevant information on the LLC and its members, then that is the thing to do.


Assignments of Interest Generally

All assignments of interest, regardless of the interest assigned, include—or should include— certain common clauses and provisions. After identifying the parties and the exact interest to be assigned, the document should state the consideration being paid; whether the consideration is nominal, cash, or a financed amount (secured or unsecured); recite both transfer and acceptance language; state whether the assignment is made entirely “as is” or instead with representations and warranties; state whether the assignee will have any recourse in the event certain post-assignment conditions are not met and identify the recourse mechanism; recite covenants and agreements of both parties that will result in the implementation of the transfer along with remedies for default if these measures are not carried out; a mutual indemnity clause; any special provisions agreed to by the parties; an alternative dispute resolution (mediation or arbitration) clause; and conclude with various miscellaneous provisions that identify applicable law and venue, advise all parties to consult an attorney, set an effective date, and so forth.

A “Consent of Non-Member Spouses” should be appended if applicable. Exhibits to the assignment (pertaining to company assets and liabilities, for instance) may also be needed.

Representations and Warranties (“Reps and Warranties”)

The assignment may include extensive reps and warranties, limited reps and warranties, or no reps and warranties at all—in which case the assignment is made entirely “as is” and (in such cases) is almost always without recourse. Representations and warranties may be made by assignor, assignee, both, or neither.

Examples of core reps and warranties would include assurances that the party, if a registered entity, is in good standing; the party has power and authority to enter into the transaction without joinder of others; and there exist no condition or circumstance that would render the transaction illegal or invalid or place the party in breach of an existing contract. Additional near-core items would include assurances that the party has performed adequate due diligence and has consulted an attorney before signing.

The foregoing are basic assurances to which no reasonable party should object. Reps and warranties get much detailed and extensive from there. If attorneys are involved, this section of a contract is usually heavily negotiated.

The assignor’s goal is to minimize ongoing liability by transferring the membership interest “as is” to the maximum extent by including only a minimum number of reps and warranties. It should be noted that inclusion of the above-mentioned core items does not impair the ability of an assignor to assign an interest “as is.” For this reason, it is always somewhat suspicious when an assignor refuses to give any reps or warranties at all.

The assignee instead prefers a longer and more specific list of reps and warranties. One of the goals of the assignee in the due diligence process is to ascertain, to the greatest extent practicable, the accuracy of reps and warranties that have been or will be made by the seller.

Both assignor and assignee should want to include a statement that neither party is making or relying upon any reps or warranties that are not expressly set forth in the assignment. The goal is to prevent anyone from assuming anything or alleging that certain assurances were implied.

It must also be determined how long representations and warranties will survive —30 days? 90 days? Indefinitely? This is another heavily-negotiated item.

A final issue in this area has to do with remedies for default by reason of a breach of representations and warranties. Attorneys frequently include a clause requiring that such default be a material (rather than a trivial) breach in order to be legally actionable. How does one define “material?” One option is to place a monetary floor on the term, e.g., by confining liability to issues that result in a loss or cost of at least $10,000.

Assignments Made “As Is”

As noted above, an assignor can include basic representations and warranties and still convey an interest “as is.” Many business persons, including lawyers, do not understand this. For example, stating that one has sufficient power and authority to enter into a transaction does not suggest any representation or warranty as to the item being conveyed.

The key to protecting the assignor is a thorough “as is” clause. Just as is true with real estate conveyances, the more thorough and extensive the “as is” clause, the better. One-liners will not do. This is particularly true if there have been oral or email negotiations over a period of days or weeks. The goal should be not only to convey the interest “as is” but also to entirely exclude any statement that cannot be expressly found within the four corners of the assignment document.

Covenants and Agreements of the Parties

The section of the assignment dealing with representations and warranties is usually followed by a discussion of the legal obligations of the parties going forward—specifically what actions they are required to take in order to implement the assignment. Covenants and agreements of the assignor include an obligation to promptly deliver any certificate that evidences the membership in question. Assignee’s obligations should include a pledge to promptly execute the company agreement.

Both parties should make a general pledge to take such other and further actions, including the execution and delivery of additional documents, as may be reasonable or necessary to effectuate the terms and intent of the assignment.

Additional covenants and agreements may be included. This is another area that is subject to negotiation.

Recourse by Assignee Upon Occurrence of Specified Conditions

The option for some form of conditional recourse may be included in any assignment of interest. As a related example, real estate notes are often sold with recourse (full or limited) against the assignor if the note borrower defaults. In such a case, without provision for recourse, the assignee would then be in possession of a non-performing asset. His remedy is not against the assignor; it is to pursue the debtor directly.

In the case of assignments of LLC interest, the assignment could provide that, upon occurrence of certain conditions, the assignee would have the right to re-convey the membership interest and receive return of all or part of the consideration. Examples of such conditions would be any adverse event—a negative outcome in a pending lawsuit or zoning proceeding; condemnation of certain LLC property; failure of a pending joint venture; or the discovery that any representations or warranties of assignor were materially false or deceptive when made. The availability of a recourse mechanism is generally time-limited, say for 90 days after closing.

Some assignments might also refer to this recourse mechanism as a right to rescind.

Mutual Indemnity

Ideally, and unless there are special circumstances, the assignor and assignee should release and indemnify one another for LLC-related actions, claims, liabilities, and obligations occurring before and after (respectively) the effective date of the assignment. Indemnity provisions are useful and worthwhile, but one needs to clearly understand their limitations. They are not a covenant not to sue.

Alternative Dispute Resolution

Since we live in a “litigation nation,” it is highly advisable to include a provision requiring mediation prior to commencing legal action. Approximately 80% of mediations result in a settlement. Mediation works, in other words.

A mediation clause should require the parties to confer in good faith and attempt to resolve a dispute in a way that accommodates the legitimate interests of both sides. If agreement is reached, it should be reduced to a signed writing. If not, the parties should then agree to formally mediate the dispute before a certified mediator prior to resorting to litigation or filing any complaint with a governmental or administrative agency. The mediation provision should also state where the mediation will be held (which city or county) and for how long (mediations are usually either a half-day or a full day). Each party should commit to bearing its own fees and costs until the mediation is concluded.

Special Provisions and Stipulations

This section of the assignment allows room for provisions that are unique and specific to the subject transaction. These almost always arise and this is the place to insert them. For example, a special provision might be an agreement to close the transaction at a certain attorney’s office.

Execution and Delivery of Documents and Records

These provisions should cover not only the assignment instrument itself (all parties should receive originals) but any affected LLC records, including the company book and seal, that may need to be transferred to a new owner or returned after due-diligence inspection. Most amateur-prepared transfers of membership interest fail to mention delivery and possession of company records, an omission that has resulted in more than a few lawsuits.


Clients contemplating an assignment of LLC membership interest should expect that their attorney will ask the following questions:

(1) What is proper formal name of the LLC? Attach a copy of the certificate of filing and the certificate of formation.

(2) Who is the seller?

(3) Who is the buyer?

(4) Please provide context: generally speaking, what is going on here? Briefly, what are you intending to accomplish? What is the purpose and goal of this transaction?

(5) Whom does this law firm represent? Who is our client?

(6) What is the business address of the LLC?

(7) Is the LLC in good standing?

(8) What exact LLC membership (i.e. percentage amount) in the LLC is being transferred?

(9) Have LLC membership certificates been issued to existing members?

(10) What are the terms of sale or transfer in this case? Cash or financed? Secured or unsecured?

(11) If the purchase price is financed, will the Seller be taking a security interest in any collateral (such as the membership interest itself)?

(12) What is the approximate gross valuation of the membership interest being assigned?

(13) Should consideration be listed as a specific monetary amount or in general terms as “Ten Dollars and Other Valuable Consideration?”

(14) On what date should the assignment be made effective?

(15) What is the current percentage make-up of membership interests (names and percentages) in the subject LLC? List the existing members and their existing percentages.

(16) What will the new make-up of membership interests look like (names and percentages) after the assignment takes place? List the members and percentages as they will be after this transaction is concluded.

(17) Will there be representations and warranties by buyer and/or seller?

(18) Will there be full recourse, limited recourse, or no recourse? This refers to the ability of the buyer to give back or re-convey the membership interest if certain conditions are not satisfied.

(19) Are there non-member spouses involved? Their names? They will be required to sign.

(20) Do you have any special provisions or stipulations you want to include?

(21) Will you need additional documents? A Special Meeting of Members that authorizes and ratifies this transaction is advised. What about a promissory note or security agreement if the transfer is financed?

(22) Do any other parties have an attorney who will be involved in the process?

(24) Will exhibits to the Assignment document be required?

(25) Do you have any additional information or instructions you wish to add?


Our law office frequently receives requests for preparation of a sale and assignment of an LLC membership interest. The client often does not understand why the assignment cannot be a simple, one-page document. It is hoped that the foregoing comments will clarify the answer to that question.


Information in this article is provided for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is expressly retained in writing to do so.  

Copyright © 2022 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website,