Membership interest—the ownership stake a member has in an LLC—is an important aspect of being part of an Iowa LLC. In the Hawkeye State, many aspects of LLC membership interest are governed by a company’s operating agreement, giving members a great deal of flexibility in how they choose to distribute and transfer that interest. In this blog, we’ll cover the basics of Iowa LLC membership interest, as well as transfers, membership certificates, and other related issues.
What is LLC Membership Interest?
In an LLC, members have an ownership stake in their company (“membership interest”), entitling them to take part in the management of the LLC and to receive distributions from company profits. This interest can be transferred or sold by the owner to another individual or entity, if allowed under the terms of the Iowa LLC’s internal operating agreement.
Upon the formation of an Iowa LLC, each member usually makes an initial contribution to the business—normally money, but sometimes also property or services, if other members agree. This contribution generally corresponds with a given member’s membership interest—such as a member who contributed a third of starting funds owning 33% of the LLC. But that is not a hard and fast rule, an LLC can decide for itself how to distribute membership interest.
Iowa LLCs can also decide how much say each member has in the management and operation of the LLC. A member could have an ownership stake but no voting rights in the LLC.
Your Iowa LLC’s operating agreement actually determines how most aspects of your company’s membership interest will be handled. Iowa statutes give LLCs broad control over how to assign interest, whether doing so requires a financial contribution or not, and if different classes of membership with different rights are allowed—but without specific stipulations in an operating agreement, your LLC may be at risk of legal action, should members disagree members over questions of membership interest.
You’ll need to establish these rules while writing your operating agreement with approval from all LLC members, or unanimously vote to approve an amendment to your operating agreement if adding new rules about membership interest.
Does a person signing documents on behalf of the LLC need to be a member?
No, per state statute, documents can be signed by an organizer designated at the company’s formation, or by any person authorized by the company after that.
Transferring Iowa LLC Membership Interest
Under Iowa’s default statutes, LLC members can sell or transfer what is referred to as “transferable membership interest,” which is the right to receive financial distributions from that interest. Crucially, this does not transfer the original member’s actual duties and obligations regarding the management of the LLC, only whatever amount of financial interest was transferred (in order to leave the LLC, by default, the original member will need to follow a process known as dissociation). But, if the operating agreement has provisions allowing it, or if all LLC members consent, the new owner of the transferable interest can become a full member with voting rights and a say in the company’s membership.
What is a membership certificate, and do I need one?
Many LLCs choose to issue membership certificates, but they are not mandatory in most jurisdictions, including Iowa. These certificates are official records of a member’s ownership percentage in the LLC, similar to stock shares for a corporation. Many membership certificates, including the template we provide, also include a section where an LLC member can sign over their interest to a new recipient.
Do I notify the Secretary of State when transferring membership interest?
Because Iowa does not require an LLC to list member names when forming the company with a Certificate of Organization, or when filing a biennial report, there is no need to inform the Iowa Secretary of State when membership interest changes.
Does the IRS need to know about membership interest changes?
Unless a transfer of interest changes an LLC’s tax status from a sole proprietorship to a multi-member partnership—or the other way around—due to adding or removing members, there is no need to contact the Internal Revenue Service when transferring interest.