LLC Interest Purchase Agreement | State LLC Act & IRC 754

A membership interest has two halves. The transferable interest is the economic side: distributions plus the allocation of profits and losses. The governance side covers voting, management, information rights and admission as a member of record. Every modern state LLC statute lets a member sell the economic half freely while blocking the governance half unless the remaining members consent. A buyer who signs a bare assignment ends up as an assignee: entitled to distributions, unable to vote, unable to inspect the books, dependent on managers he did not choose. An LLC membership interest purchase agreement closes that gap by combining the sale, the waiver of the transfer restrictions and the buyer's admission as a substituted member in one signed package.

The structure also explains what this document is not. It is not an asset and stock business purchase agreement, which conveys equipment, goodwill and contracts item by item and leaves the selling entity standing. Nor is it a shareholder agreement for a C-corp or S-corp, since an LLC has no shares and no stock ledger. The entity survives untouched, and its liabilities, tax history and pending litigation all come with the interest. Representations and warranties therefore carry far more weight here than in an asset deal.

Three bodies of law govern the transaction at once, and they do not always point the same way. The first is the LLC act of the state of formation. Delaware's 6 Del. C. §18-702 is the model: an interest is assignable in whole or in part, the assignee takes only distribution rights, and admission as a member requires unanimous consent unless the operating agreement says otherwise. California, New York, Texas and Florida all track the same distinction in their own codes.

The second is the operating agreement, which beats the statute nearly every time. State LLC acts are almost entirely default rules, so a right of first refusal, a buy-sell formula or an outright ban on transfers written into the company's own agreement controls the deal. Read the operating agreement before you agree on a price, because a transfer made in breach of it is voidable, and the buyer's remedy against a seller who had no authority to sell is a lawsuit, not an interest. Where no written agreement exists, the statutory defaults apply and a proper LLC operating agreement template drafted to your state's LLC Act should be adopted at or before closing.

The third is federal tax law. An LLC with two or more members falls under subchapter K unless it has elected corporate treatment, so the sale is governed by IRC §741, with ordinary income carved out under §751(a) for unrealized receivables and inventory. The buyer's outside basis equals the price plus his share of company liabilities under §752, and inside basis steps up only if a §754 election is in effect, as set out in the Cornell Legal Information Institute text of Internal Revenue Code section 754. A downward adjustment is mandatory under §743(d) when the company carries a substantial built-in loss at the statutory threshold, election or no election. Securities law sits on top: a passive membership interest is usually an investment contract under SEC v. W.J. Howey Co., which pulls Rule 10b-5 anti-fraud liability into a deal the parties thought was purely contractual.

The most common trigger is the buyout of a departing member. Two founders drift apart, one wants liquidity, and the remaining member or the company itself buys the interest. Price is usually the easy part; the fight is over what the seller promises about the business he is leaving behind. The second scenario is an investor buying in from an existing member rather than from the company. A secondary purchase puts no new capital into the business, so the other members care intensely about who the newcomer is and which governance rights travel with the interest.

Acquirers of small operating companies use this document when the target holds something that cannot be moved. Liquor licenses, contractor registrations, provider numbers, favorable long term leases and government contracts often survive a change of ownership at the member level but die in an asset sale. Buying the interest keeps the entity, the EIN and the permits intact.

Two situations deserve a warning. When one buyer acquires every interest in a multi-member LLC, Rev. Rul. 99-6 treats the sellers as selling partnership interests while the buyer is treated as buying the assets directly, and the partnership ends on the spot. The other is the transfer of a minority interest inside a family, where discounts for lack of marketability and lack of control invite scrutiny and demand a defensible appraisal.

• The purchase price and payment mechanics clause covers the structures real deals use: cash at closing, promissory note secured by the transferred interest, escrow holdback against indemnity claims, and post-closing adjustments tied to working capital or capital account balances.
• The seller's title representations confirm ownership of the stated percentage free of liens, the absence of any charging order or pledge, and that no third party holds an option or right of first refusal over the interest. Company-level representations run alongside them, reaching financial statements, undisclosed liabilities, tax filings, employee matters, litigation and material contracts, each drafted so the seller can qualify it by knowledge or by schedule.
• The consent and admission block does the work most assignments forget. It records the waiver of transfer restrictions, the consent of the required percentage of members, the buyer's agreement to be bound by the operating agreement, and the amended members schedule that admits the buyer with full voting rights.
• The tax covenants allocate the year's income using either an interim closing of the books or a proration method under §706(d), address the §751(a) ordinary income component, commit the company to make or withhold a §754 election, and require Form 8308 reporting to both parties within the statutory window.
• The restrictive covenants and mutual release protect the going concern the buyer just paid for. A seller non-compete is drafted to the enforceability rules of the governing state, which is where a non-compete and non-solicitation agreement enforceable in your state becomes a companion document rather than an afterthought.
• The indemnification article sets survival periods, a basket before claims can be brought, a cap tied to the price, and longer survival for fundamental representations such as title, authority and taxes.

Delaware remains the default choice for LLCs with outside investors, and its statute is the most permissive in the country. 6 Del. C. §18-702(a) lets the operating agreement define transferability however the members like, and §18-1101(c) allows fiduciary duties to be eliminated entirely except for the implied covenant of good faith and fair dealing. A buyer taking a minority position should read that waiver closely: the manager who owes no duties today owes none after closing either.

California applies the California Revised Uniform Limited Liability Company Act, where Cal. Corp. Code §17704.01(d) requires the consent of all members to admit a transferee unless the operating agreement provides otherwise. Confirm the company's franchise tax and fee status with the Franchise Tax Board before closing, since a suspended LLC cannot enforce its own contracts and the balance follows the entity.

New York carries a trap that catches acquirers repeatedly. Under N.Y. LLC Law §609(c), the ten members holding the largest ownership interests can be personally liable for unpaid wages owed to the company's employees, so a buyer taking a significant position inherits that exposure and wage diligence belongs in the schedules. New York also taxes the transfer of a controlling interest in an entity holding real property under N.Y. Tax Law §1401(e), which turns a membership interest sale into a taxable conveyance when the company owns a building.

Texas allows transfers under Tex. Bus. Orgs. Code §101.108, and §101.109 limits the transferee to economic rights until admitted. Franchise tax standing matters here too: a company whose right to transact business is forfeited cannot maintain a suit in Texas courts, and reinstatement is the seller's obligation, not the buyer's problem to discover after closing.

Florida codifies the transferable interest rule at Fla. Stat. §605.0502 and, following Olmstead v. FTC, treats single-member and multi-member companies differently in §605.0503. Foreclosure on a charging order stays available against a single-member LLC, so a buyer acquiring the only interest in a Florida company loses the creditor protection a multi-member structure would have preserved.

You start by naming the company, its state of formation and the exact percentage or number of units being sold, taken from the operating agreement's members schedule rather than from memory. The form asks whether the buyer is an existing member or a newcomer, which controls the consent and admission language and the number of signatures the closing requires. Price comes next, with a branch for lump sum, installments or an escrowed holdback.

The tax section asks whether the company is treated as a partnership, a disregarded entity or a corporation, then adjusts the allocation covenants, the §754 language and the reporting obligations accordingly. Representations are generated at the level you choose, from a title-only set for a friendly internal buyout to a full schedule-backed set for a third-party acquisition. The finished agreement downloads in editable Word and signature-ready PDF, alongside the assignment, the member consent resolution and the updated members schedule. Other governance records live in the business contracts and incorporation documents library if the closing exposes gaps.

The most expensive mistake is treating the assignment as the whole transaction. A one page assignment transfers distributions and nothing else, and the buyer discovers months later that he cannot vote, cannot force a distribution and cannot see the books. Close behind is closing without the consents the operating agreement demands: unanimous member approval, a waived right of first refusal, a lender's consent under a change of control covenant. Sellers make the mirror image mistake by signing broad representations about a business they no longer control and staying exposed under a survival period they never read.

Tax errors cluster around three points. Parties forget the §751(a) recharacterization and report the whole gain as capital, which the IRS corrects with interest. They assume a basis step-up happens automatically, when it happens only if the company elects under §754, and the buyer has no unilateral power to force one after closing. A buyer who wants the step-up must make the election a signed covenant of the company before the money moves. Old technical termination advice still circulates as well, years after §708(b)(1)(B) was repealed. One more: nobody updates the responsible party on file with the IRS, and Form 8822-B is due within sixty days of the change.