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When Do You Need to Issue Membership Certificates?

Date: 12/19/2016 | Category: Incorporation | Author: Jakub Vele

Membership certificates are issued to those who have an ownership interest in an LLC. An ownership interest in an LLC is referred to as a membership interest. Membership certificates are similar to stock certificates, except for the fact that they are issued by LLCs instead of corporations. However, there are some differences between the two. LLCs must abide by the laws of the state in which they are created. States tend to be very flexible in the rules that govern LLCs so long as LLCs abide by their own operating agreements.

When Does an LLC Need to Issue Membership Certificates?

Under the law, LLCs do not have to issue membership certificates. The value of a membership interest is defined by an LLC’s operating agreement. Members pay a capital contribution to the LLC and receive a specified percentage, or number of units, of ownership interest in the LLC in return. There is no limit on the number of units of membership interest that can be issued. Additionally, records of who holds the membership interests are keep in a membership transfer ledger. Thus, the membership interest is derived from a contract between the LLC and the members; members do not need to hold membership certificates to establish proof of their own membership interest.

The parameters of membership certificates must be defined in the operating agreement. These parameters include their value, the process for issuing the membership certificates, and the percentage of interest that they signify. These parameters differ from the issuance of there are some common rules that govern stock issuance.

There are times, however, when it is wise for an LLC to issue membership certificates, despite it not being required by law. This holds especially true when an LLC seeks to raise capital through selling membership interest units to investors.

Multi-Member LLCs Seeking Investors

LLCs with a small group of members that are not seeking investors may not feel the need to issue membership certificates. Multi-member LLCs that are seeking investors, however, should issue membership certificates due to the fact that restrictions are often placed on the type of membership interest that the investor can hold. In order to ensure that restrictions such as transfer restrictions placed on membership interest, reverse vesting, and buy-sell provisions are enforceable against the holder of the membership interest, it is important to issue membership certificates which clearly state these provisions. Thus, the best way to ensure that any restrictions on membership interest is enforceable, membership certificates should be issued which include legends that state said restrictions. If these LLCs fail to issue membership certificates with legends that denote the terms and provisions of the membership interest, these provisions and restrictions may not be enforceable against anyone to which the membership interest is transferred who can prove that he or she did not have knowledge of the provisions and restrictions.

Therefore, when setting up an LLC, the members of the LLC can choose not to issue membership certificates in accordance with their operating agreement. In order for any restrictions, such as transfer of interest restrictions, to be enforceable against an investor in a multi-member LLC, it is necessary for this LLC to issue membership certificates with the provisions and restriction clearly stated.

Where to create membership certificates?

As customer of IncParadise, you have  free access to our app, “Company Minutes,” where you can create all necessary certificates in a few simple steps. If you are not our customer, we recommend using this online generator – it is completely free!

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