Can I Transfer my LLC to Another Person?
As has been written about in other blog posts, the various business structures each have different strengths and weaknesses. One of the biggest strengths of the corporate form is its provision of limited personal liability to owners. Another strength is the free transferability of shares. The unique ability of corporate shareholders to transfer shares is not absolute, however.
Can Ownership of a Corporation be Transferred?
Due to the corporation’s status as an entity separate from its owners, the transferability of shares is a “general reasonable expectation” and, absent valid restrictions on the transferability of shares imposed by contract, shareholders have the fundamental right to sell their shares to whom they please at such a price as they deem fit.[1] But while the default is that ownership shares are freely transferable, this “free transferability” may be contracted around. For example, Florida Statute §607.0627 provides that the “articles of incorporation, the bylaws, an agreement among shareholders, or an agreement between shareholders and the corporation may impose restrictions on the transfer” of shares.[2] Section 607.0627 further provides that a restriction on the transfer of shares is authorized to “maintain the corporation’s status when it is dependent on the number or identity of its shareholders,” to “preserve exemptions under federal or state securities law,” or “for any other reasonable purpose.”[3]
Can Ownership of an LLC be Transferred?
One would expect that since the LLC is an entity similar to a corporation, owners would be able to transfer their shares and the rights associated with ownership as desired. Such a notion is erroneous, however. LLCs create a distinction between financial rights and governance rights. Financial rights are the rights to share in the profits, losses, and distributions of the company. Governance rights are the rights to vote and to manage the business of the LLC. Unless the articles of organization or operating agreement provide otherwise, financial rights are freely transferable and are fully preserved by the LLC. Governance rights, unlike financial rights, are not freely transferable. Thus, transfer of financial rights does not give membership rights to the transferee but merely grants to the transferee a right to partake in the LLC’s profits, losses, and distributions.[4]
Of course, it is important to keep in mind that this is a standard provision provided for by Florida law. Hence, an LLC Operating Agreement enacted by the members at formation may provide other rules for transferring shares. Generally, operating agreements will provide that members can transfer financial rights but cannot transfer governance rights unless they obtain consent from the LLC’s other members.
[1] Ritchie v. Rupe, 339 S.W.3d. 275 (2011).
[2] Fla. Stat. §607.0627 (1).
[3] Fla. Stat. §607.0627 (3).
[4] Fla. Stat. §605.0502.
