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Free Transferability of Interest

15 January, 2016 - 09:36

Again, the problem here is that if a member’s interest in the LLC is as freely transferable as a shareholder’s interest in a corporation (an owner can transfer all attributes of his interest without the others’ consent), the LLC will probably be said to have a check mark in the “corporate-like” box: too many of those and the firm will not be allowed pass-through taxation. Thus the trick for the LLC promoters is to limit free transferability enough to pass the test of not being a corporation, but not limit so much as to make it really difficult to divest oneself of the interest (then it’s not a very liquid or desirable investment).

Some states’ LLC statutes have as the default rule that the remaining members must unanimously consent to allow an assignee or a transferee of a membership interest to participate in managing the LLC. Since this prevents a member from transferring all attributes of the interest (the right to participate in management isn’t transferred or assigned), the LLC formed under the default provision will not have “free transferability of interest.” But if the LLC agreement allowsmajorityconsent for the transfer of all attributes, that also would satisfy the requirement that there not be free transferability of interests. Then we get into the question of how to define “majority”: by number of members or by value of their membership? And what if only the managing partners need to consent? Or if there are two classes of membership and the transfer of interests in one class requires the consent of the other? The point is that people keep pushing the boundaries to see how close their LLC can come to corporation-like status without being called a corporation.

Statutes for LLCs allow other business entities to convert to this form upon application.


The limited liability company has become the entity of choice for many businesspeople. It is created by state authority that, upon application, issues the “certificate of organization.” It is controlled either by managers or by members, it affords its members limited liability, and it is taxed like a partnership. But these happy results are obtained only if the firm lacks enough corporate attributes to escape being labeled as a corporation. To avoid too much “corporateness,” the firm’s certificate usually limits its continuity of life and the free transferability of interest. The ongoing game is to finesse these limits: to make them as nonconstraining as possible, to get right up to the line to preserve continuity, and to make the interest as freely transferable as possible.


  1. What are the six attributes of a corporation? Which are automatically relevant to the LLC? Which two corporate attributes are usually dropped in an LLC?
  2. Why does the LLC not want to be treated like a corporation?
  3. Why does the name of the LLC have to include an indication that it is an LLC?
  4. How did LLCs finesse the requirement that they not allow too-free transferability of the interest?