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This is the third article in a series about the four elements (limited liability, continuity of life, centralized management, and transferability) that you can choose from in setting up an LLC. When you set up an LLC, you can theoretically only choose two of the four. Transferability refers to whether or not an owner is allowed to sell his or her shares in the company. This article will talk about that.

Ownership of a corporation is represented by stock, and a person owns a certain number of shares of stock. In an LLC, ownership is represented by membership interests. You can own a specific number of membership interests, but usually you will own a percentage of the membership interests. Transferability of ownership is a big deal if the company’s ownership is publicly traded. Corporations sell stock, and that stock is traded and traded and traded. That is transferability. All of the big New York Stock Exchange corporations have transferability because the interests (stock) are transferable. Today, LLCs can also be publicly traded using membership interests.

Most of the companies that trade ownership interests publicly are organized in Delaware. Delaware has unique laws dealing with transferability of ownership interests (stock or membership interests). However, most corporations and LLCs are not publicly traded. They are “closely held,” because they are owned by one or just a few owners. In most of these companies, the owners don’t want the ownership interests to be transferable.

Technically, transferability cannot totally be restricted in a corporation, because transferability is one of the four elements of the corporation. But restrictions, such as “first rights of refusal” are often placed on any attempted transfer of stock or membership interests. There are a number of types of restrictions that can be placed on transferability, even in a corporation.

Transferability is defined in the corporation’s bylaws or the LLC’s operating agreement. The rules need to be carefully set out in your documents. Otherwise you get your state’s rules, and you probably won’t want the state’s rules.

In most states it is “legal” to prevent the transfer or assignment of membership interests. Transfer and assignment (which is a little different than transfer) of those interests are often limited to approval of the other owners. If the owners don’t approve, then the ownership can’t be transferred or assigned. This will offer the other owners some asset protection. If a creditor is trying to get an owner’s ownership interest, and the company rules say the ownership cannot be assigned, it is possible the creditors can’t get their meat hooks into the company. This is quite effective for LLCs, because LLCs have a genetic element of partnerships.

The effectiveness of any restrictions on transferability are subject to state laws. If your LLC documents say no transfer under any circumstances, some states uphold that. Of course, transfers at death are usually unrestricted, but even those transfers can be limited to buyout provisions, if they are defined in the company documents (bylaws or operating agreement).

The asset protection aspects of limiting transferability in an LLC really can be a good asset protection tool. Suppose a creditor sues you and wants to get their money by dismantling your company. Certain language preventing transfers and assignments has been held by the courts to prevent someone from coming in and taking over the LLC when one of the members gets in financial or legal trouble personally.  Many of the LLC operating agreements I see just ignore the issue of transferability.  You should actively prevent transferability in your LLC by including language limiting the ability to transfer your company’s membership interests.  If you do, you are obviously “not choosing” transferability as one of your two selections from the four corporate elements.

In my Operating Agreement, the question of transferability is handled by having you choose one of the following two options:

4.8       Member Sale, Assignment or Exchange.   A Member or a Member’s legal representative has the power to sell, assign or exchange such Member’s Membership Interest.


4.8       Member Sale, Assignment or Exchange. A Member or a Member’s legal representative has the power to sell, assign or exchange such Member’s Membership Interest only with the majority approval of the other Members.

By restricting the transfer to having approval of the other members, you are not choosing transferability as one of your two choices.

You can get a free copy of my operating agreement template at


  1. What if I am setting up my company and am currently a one man show, but down the road when I have kids or key employees that I would like to share ownership/membership with, do I need to have transferability to do that on a case by case basis?


    • Lee,
      You do not have to have free transferability to be able to add more members to a company. It all depends on what is written in the operating agreement.
      You can have a provision that allows for the transfer of membership interests but is limited by a right of first refusal. This would not qualify as selecting free transferability but you can still transfer interest.
      If you are adding new members you also may not be transferring memberships. A new member may be added by having the LLC provide more membership interests in exchange for capital being contributed to the LLC. No membership interest is being transferred, instead new membership interest is being created. This is all dependent upon how the operating agreement reads. Does issuing new membership interests require the vote of the members, can it be done at all, etc.?

  2. Mr Phillips

    Its me again , I’ve chosen limited liability and centralized management
    as my two elements of an llc taxed as a S corp. Will the OWNERSHIP CERTIFICATE
    TRANSFER LOG concern me. If so would that be considerated transferability of interests .

    • Derek,
      You will need a log of membership ownership which will record who owns membership in the LLC. Even if you are the only member, you need to list yourself and show that you hold a certificate of membership which shows how much of the LLC you own. The transferability element of a corporation isn’t being able to transfer your interest, it is the ability to freely transfer your interest. You can still have the ability to transfer interest in the LLC but you need to have restrictions on that transfer in the operating agreement, so it does not count as free transferability.

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