LLCs differ from corporations in that LLC ownership is determined by membership interest, whereas ownership of a corporation is determined by shares. LLC owners are called members, and the percentage of membership interest each member has determines how much of the LLC he or she owns. Unlike corporate shares, LLC membership interest cannot be transferred without the consent of the other LLC owners. Since each jurisdiction has its own LLC laws, Massachusetts LLCs should be familiar with Massachusetts’ laws for assigning membership interest. We’ll explain how to assign and transfer membership interest within your Massachusetts LLC.
Initial Contributions to Your Massachusetts LLC
When you start your Massachusetts LLC, each member should make an initial contribution to the business. In most cases, members contribute money, but members can also contribute property or services, depending on what all members agree upon.
In most cases, the member’s contribution corresponds with their membership interest—meaning, the member who contributes 51% of the funds would own 51% of the LLC. However, that doesn’t have to be the case. Each LLC can make its own rules for how membership interest is distributed. LLCs can also determine how much voting power each LLC member has. It’s possible for an LLC member to have an ownership stake but no voting rights in the LLC. In order to create the rules you want for your LLC, you’ll need to create a written LLC operating agreement.
Massachusetts LLC operating agreement
A Massachusetts LLC operating agreement is a legal document that formalizes the policies of an LLC. This is where you put into writing each member’s initial contributions, ownership stake, distributions they are entitled to, and voting power, among other matters. According to MA Gen L ch 156C § 2 (9), an operating agreement can be “written or oral,” but since oral operating agreements are nearly impossible to prove, they’re pretty much useless if your LLC goes to court. In order to head off future conflicts, the smart thing is to create a written operating agreement and have all members sign it.
If you don’t have a written operating agreement, Massachusetts law still requires you to have a written record that states:
- The amount of money or other contributions each member has made to the LLC
- Future events or dates in which members have agreed to make additional contributions
- The rights of members to receive distributions
- The rights of managers (for manager-managed LLCs) to make distributions to members
- Any events in which the LLC would be dissolved
See MA Gen L ch 156C § 9 to learn more.
Is there a limit to the number of LLC members you can have?
Nope! Your LLC can have as many members as you want. However, having a large amount of members makes your business more complex and could make conflict more likely, so it’s a good idea to consult an attorney before inviting new members into your LLC.
Can an LLC issue shares?
No, unlike corporations, LLCs do not have shares (also called stock) and thus cannot issue shares. While a corporation’s shares can be freely bought and sold, LLC membership interest can usually only be transferred with the agreement of all LLC owners. For that reason, investors typically prefer investing in corporations rather than LLCs. If one of your business goals is to raise a large amount of capital from investors, it’s a good idea to consider starting a corporation instead of an LLC.
Transferring LLC Membership Interest in Massachusetts
According to MA Gen L ch 156c § 39, an LLC member may transfer part or all of their membership interest to someone else. The law also says that transferring membership interest does not automatically give the new member any control over the LLC’s affairs. The new member will only have voting rights and other powers within the LLC if all other members agree to this.
However, if you have an operating agreement, you can make different rules for your LLC. For example, you could state in your operating agreement that LLC membership interest cannot be transferred, or can only be transferred within a certain context.
When transferring membership interest in Massachusetts, be sure to follow these steps.
1. Consult your operating agreement
It’s crucial that you follow your operating agreement’s policy for transferring membership interest. Otherwise, a court could decide that the transfer of membership interest wasn’t legitimate.
2. Hold a vote
Unless your operating agreement says differently, you’ll need to hold a vote of all LLC members to transfer membership interest to a new member. Typically, transferring membership interest can only be done with unanimous agreement. You should record this decision in writing by drafting a member resolution.
3. Update your operating agreement
Once the decision to transfer membership interest has been approved, you should update your operating agreement to include your new member, their ownership percentage, and any other member’s ownership percentage that has changed.
Do I need to notify the state about LLC membership changes?
Usually not. In Massachusetts, only LLC managers and people authorized to buy and sell property on behalf of the LLC are required to be listed on the MA Certificate of Organization, which goes on the public record. (If there are no managers, at least one person authorized to make decisions for the LLC must be listed.) Unless the person leaving or joining your LLC is or will be a manager, you probably don’t need to report this change by filing an MA LLC Amendment or on your MA annual report. However, you can include LLC members on the public record if you want, and if you do, you can report changes by filing an amendment.