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How to Transfer a California LLC Interest to a New Owner

Jeramie Fortenberry, J.D., LL.M.

Table of Contents

California calls a person who owns a California LLC a member. 1 A member’s ownership interest in a California LLC is called a membership interest . 2 A membership interest in a California LLC consists of two interests that can be separated:

• The member’s right to vote on LLC matters and participate in company affairs; and
• The member’s right to receive financial distributions from the company (a transferable interest ). 3

Because these two interests are distinct, a person can acquire a right to receive distributions from the LLC without becoming a member with voting rights. 4 Likewise, a person may become a member without receiving a transferable interest ( i.e. , the right to receive distributions) in the LLC. 5

A transfer of a California LLC interest may refer to a transfer of a current member’s membership status to a new member, or it may refer to transfer of a member’s transferable interest (or both). In either case, the LLC’s California operating agreement primarily governs transfers of ownership interests.

How Does an LLC Owner Transfer a Transferable Interest in a California LLC?

California law considers a member’s transferable interest in an LLC to be personal property that the member can transfer to another person. 6 A person to whom a member transfers a transferable interest is called a transferee . 7 A transferee receives only the right to receive distributions that the member would otherwise receive. 8 A transferee does not acquire a right to vote on LLC matters or participate in company management unless the transferee is also admitted as a member. 9

A transfer of a transferable interest in a California LLC must comply with the company’s operating agreement. A transfer that violates a transfer restriction in the operating agreement is void as to anyone who was aware of the restriction when the transfer occurred. 10

A transfer of a member’s transferable interest does not, by itself, result in a loss of the member’s voting rights or membership status. 11 In other words, a member can transfer the right to receive distributions from the company without losing the right to participate in the company’s management or vote on important matters.

How Can a Non-Member Become a Member of a California LLC?

A non-member can be admitted as a member under the terms for admission of new members in the LLC’s operating agreement or with the consent of all existing members. 12 A person may also acquire a membership interest in a California LLC in connection with a California LLC conversion or domestication from another state. 13

It is not uncommon for operating agreements to place important restrictions on membership transfers. Restrictions protect the business owners from losing control of the company or finding themselves in business with a purchaser without the other members’ consent.

Business owners should decide when and how membership interests may be transferred or new members admitted when forming a California LLC . An operating agreement might, for example, allow a non-member to become a member only upon approval of all existing members. Or, an operating agreement may establish eligibility criteria for new members—such as a license or certification in the type of business in which the LLC engages.

What Happens to a California LLC Interest When a Member Gets Divorced or Dies?

The process through which a current member of a California LLC ceases to be a member is called dissociation . 14 A member’s death ordinarily results in automatic dissociation of the deceased member from the LLC. 15 The personal representative of the deceased member’s estate is treated like a transferee who received the member’s transferable interest. The personal representative can exercise the member’s rights as a member to the extent necessary to settle the estate, but those rights cease once the transferable interest is distributed from the deceased member’s estate. 16

Operating agreements usually include provisions addressing death of a member. These provisions are often designed to avoid an heir’s becoming a member without surviving members’ consent and will sometimes set a formula for the LLC or other members’ to purchase the deceased member’s membership interest from the estate.

What if a Deceased Owner is the LLC’s Only Member?

A California LLC generally has to have at least one member, and an LLC with no members for 90 days is automatically dissolved. However, California has an exception for single-member LLCs. If the only member of a single-member LLC dies, the membership status can pass to a devisee or heir under the deceased member’s will or under intestate succession laws. 17 The personal representative of the deceased member’s estate can exercise the deceased member’s rights to the extent needed to transfer the membership interest through the estate process. 18

Can an LLC Owner’s Creditors Attach an Interest in a California LLC?

California law allows an LLC member’s creditor to request that a court issue a charging order attaching the member’s interest. 19 A charging order is a lien on the member’s transferable interest—or right to distributions from the company. An LLC served with a charging order that attaches a member’s transferable interest must pay to the creditor any distributions that would otherwise go to the member.

The creditor can request foreclosure of the member’s transferable interest if the creditor can show that the distributions will not satisfy the judgment within a reasonable time. A purchaser acquires only the member’s transferable interest—not the member’s right to vote or otherwise participate in the LLC’s affairs. The purchaser therefore does not become a member of the LLC. 20

Can a California LLC Member Voluntarily Withdraw from the Company?

An LLC’s operating agreement governs the terms of members’ dissociation and can prohibit a member from withdrawing from the company. 21 Even so, a member of a California LLC has a right to withdraw ( voluntarily dissociate ) as a member at any time. 22 If a member’s withdrawal violates the operating agreement, the dissociation is wrongful, and the member is liable to the LLC and the other members for any resulting damage. 23

California’s default law does not require the LLC to compensate a member who withdraws. An operating agreement can provide for compensation under certain circumstances—such as when a member retires.

Can a California LLC Member be Expelled from the Company?

A California LLC’s operating agreement may identify conditions under which the members can expel ( involuntarily dissociate ) another member, or it may prohibit expulsion. 24 Other members can petition a court to expel a member engaged in:

• Wrongful conduct that damages the LLC,
• Willful material breaches of the operating agreement, or
• Conduct that makes it impractical to carry on the LLC with the person as a member. 25

A member who is dissociated from a California LLC—whether by voluntary withdrawal, expulsion, or an event identified in the operating agreement—no longer has right to vote or participate in the LLC’s management. 26 A dissociated member who still has financial rights in the company is treated as a transferee. 27

• Cal. Corp. Code § 17701.02(p) .
• Cal. Corp. Code § 17701.02(r) .
• Cal. Corp. Code § 17701.02(aa) .
• Cal. Corp. Code § 17705.02(a)(3) .
• Cal. Corp. Code § 17704.01(d) .
• Cal. Corp. Code § 17705.01 .
• Cal. Corp. Code § 17701.02(ab) .
• Cal. Corp. Code § 17705.02(b) .
• Cal. Corp. Code § 17705.02(f) .
• Cal. Corp. Code § 17705.02(g) .
• Cal. Corp. Code § 17704.01(c) .
• Cal. Corp. Code § 17704.01(c)(2) .
• Cal. Corp. Code § 17706.01 .
• Cal. Corp. Code § 17706.02 .
• Cal. Corp. Code §§ 17705.04 ; 17706.02(i) .
• Cal. Corp. Code § 17707.01 .
• Cal. Corp. Code § 17705.04 .
• Cal. Corp. Code § 17705.03 .
• Cal. Corp. Code § 17705.03(b) .
• Cal. Corp. Code § 17706.01(a) .
• Cal. Corp. Code § 17706.01(c) .
• Cal. Corp. Code § 17706.03(a) .