The title of this post is confusing. LLCs do not have shares.
Chapter 57D of the North Carolina General Statutes is the governing law pertaining to North Carolina Limited Liability Companies.
Corporations, such as The Coca Cola Company, have shares to indicate ownership.
Limited Liability Company ownership is a bit different than the ownership structure of a Corporation.
North Carolina Limited Liability Companies do not have shareholders. Limited Liability Companies have “Interest Owners.”[1]
An “interest owner” can be one of two types, a “member” or an “economic interest owner.”[2]
For all practical purposes, a “member” of an LLC is a person who has been admitted as a member of the LLC as provided in the operating agreement of the LLC, or by being named as a member in the Articles of Organization, or in the case of a person acquiring an ownership interest in the LLC, by unanimous approval of all other members.[3]
A “member” need not make or have the obligation to make any contributions to the LLC or share in any profits or losses or, distributions from, the LLC or otherwise own an economic interest in the LLC.[4]
An “economic interest owner” is a person who owns an economic interest but is not a member.[5]
An “economic interest” is the proprietary interest of an interest owner in the capital, income, losses, credits, and other economic rights and interest of a limited liability company, including the right of the owner of the interest to receive distributions from the limited liability company.[6]
In a nutshell, an LLC has two types of interest owners, members and economic interest owners.
An LLC is managed by its managers.[7] Unless otherwise provided in the operating agreement, all members of an LLC are managers of an LLC.[8]
“Economic interest owners” do not have any management rights to an LLC.
The title of this post is “What Happens When You Transfer Shares of Your North Carolina Limited Liability Company?”
Maybe it should have been titled, “What Happens When You Transfer Your Ownership Interest of Your North Carolina Limited Liability Company?”
Hypotheticals
Assume Jim and John have an LLC, named JJ Properties, LLC. The LLC does not have an operating agreement. However, it is agreed that Jim has a 60% ownership interest and John has a 40% ownership interest. The LLC owns a residential rental property. The LLC has no other assets.
1. What if Jim wants to transfer 50% of the LLC to his daughter Jane while Jim is alive?
Technically if Jim gives Jane 50% of his ownership interest to Jane, Jane cannot become a member without approval of all other members.[9] Jane will not obtain any management rights in the LLC.
Will Jane become an economic interest owner? Economic interests are transferable in whole or part.[10] If Jim transfers 50% of his ownership interest in the LLC to Jane, he will transfer 50% of his economic interest.
2. What if the scenario is changed so that at the time of organization, Jim is deemed as a 55% owner Jane a 5% owner John a 40% owner.
Jim, then decides to give Jane another 50% ownership interest in the LLC. Did Jim’s gift of 50% transfer his portion of membership interest? Yes. Since Jane is already a member, there is no need for her to be admitted as a member.[11] Jane now has a 55% ownership interest, Jim 5%, and John 40%.
3. Instead, assume that when the LLC is organized Jim owns 100% of the LLC’s ownership interest. Jim dies leaving all of his property to his daughter Jane and names Jane as the Executrix of his estate?
An ownership interest in an LLC is considered personal property.[12] At the time Jane qualifies as the personal representative of Jim’s Estate, Jim’s ownership interest in the LLC would vest in his Executrix, Jane.[13]
Jane, the Executrix, will not be a member.[14] Jim would have ceased to be a member due to his death.[15] The executrix will only be an economic interest owner. Jane, will not have the authority to manage the LLC, dissolve the LLC, or transfer the real estate out of the LLC.[16] This would be a situation in which the LLC would be left without any members and no one to manage the LLC. According to N.C.G.S. § 57D-6-01(3), an LLC is to dissolve because the LLC has no members. However, Jane may admit herself as a member in accordance with N.C.G.S. 57D-6-01(3).
This third scenario might be an unnecessary academic exercise. A title insurance company might insure the title to the residential real property if Jane decides to sell it regardless as to whether or not the LLC is supposed to be dissolved, has no members, etc. After all, no one else in the world could claim ownership in the LLC and the real estate other than Jane.
Conclusion
The purpose of this post is to point out that if you have an “ownership interest” in an LLC, that property right is different than owning shares in a corporation.
If you have any questions about an LLC or an estate, please don’t hesitate to contact me.
Chapter 57D of the North Carolina General Statutes is the governing law pertaining to North Carolina Limited Liability Companies.
Corporations, such as The Coca Cola Company, have shares to indicate ownership.
Limited Liability Company ownership is a bit different than the ownership structure of a Corporation.
North Carolina Limited Liability Companies do not have shareholders. Limited Liability Companies have “Interest Owners.”[1]
An “interest owner” can be one of two types, a “member” or an “economic interest owner.”[2]
For all practical purposes, a “member” of an LLC is a person who has been admitted as a member of the LLC as provided in the operating agreement of the LLC, or by being named as a member in the Articles of Organization, or in the case of a person acquiring an ownership interest in the LLC, by unanimous approval of all other members.[3]
A “member” need not make or have the obligation to make any contributions to the LLC or share in any profits or losses or, distributions from, the LLC or otherwise own an economic interest in the LLC.[4]
An “economic interest owner” is a person who owns an economic interest but is not a member.[5]
An “economic interest” is the proprietary interest of an interest owner in the capital, income, losses, credits, and other economic rights and interest of a limited liability company, including the right of the owner of the interest to receive distributions from the limited liability company.[6]
In a nutshell, an LLC has two types of interest owners, members and economic interest owners.
An LLC is managed by its managers.[7] Unless otherwise provided in the operating agreement, all members of an LLC are managers of an LLC.[8]
“Economic interest owners” do not have any management rights to an LLC.
The title of this post is “What Happens When You Transfer Shares of Your North Carolina Limited Liability Company?”
Maybe it should have been titled, “What Happens When You Transfer Your Ownership Interest of Your North Carolina Limited Liability Company?”
Hypotheticals
Assume Jim and John have an LLC, named JJ Properties, LLC. The LLC does not have an operating agreement. However, it is agreed that Jim has a 60% ownership interest and John has a 40% ownership interest. The LLC owns a residential rental property. The LLC has no other assets.
1. What if Jim wants to transfer 50% of the LLC to his daughter Jane while Jim is alive?
Technically if Jim gives Jane 50% of his ownership interest to Jane, Jane cannot become a member without approval of all other members.[9] Jane will not obtain any management rights in the LLC.
Will Jane become an economic interest owner? Economic interests are transferable in whole or part.[10] If Jim transfers 50% of his ownership interest in the LLC to Jane, he will transfer 50% of his economic interest.
2. What if the scenario is changed so that at the time of organization, Jim is deemed as a 55% owner Jane a 5% owner John a 40% owner.
Jim, then decides to give Jane another 50% ownership interest in the LLC. Did Jim’s gift of 50% transfer his portion of membership interest? Yes. Since Jane is already a member, there is no need for her to be admitted as a member.[11] Jane now has a 55% ownership interest, Jim 5%, and John 40%.
3. Instead, assume that when the LLC is organized Jim owns 100% of the LLC’s ownership interest. Jim dies leaving all of his property to his daughter Jane and names Jane as the Executrix of his estate?
An ownership interest in an LLC is considered personal property.[12] At the time Jane qualifies as the personal representative of Jim’s Estate, Jim’s ownership interest in the LLC would vest in his Executrix, Jane.[13]
Jane, the Executrix, will not be a member.[14] Jim would have ceased to be a member due to his death.[15] The executrix will only be an economic interest owner. Jane, will not have the authority to manage the LLC, dissolve the LLC, or transfer the real estate out of the LLC.[16] This would be a situation in which the LLC would be left without any members and no one to manage the LLC. According to N.C.G.S. § 57D-6-01(3), an LLC is to dissolve because the LLC has no members. However, Jane may admit herself as a member in accordance with N.C.G.S. 57D-6-01(3).
This third scenario might be an unnecessary academic exercise. A title insurance company might insure the title to the residential real property if Jane decides to sell it regardless as to whether or not the LLC is supposed to be dissolved, has no members, etc. After all, no one else in the world could claim ownership in the LLC and the real estate other than Jane.
Conclusion
The purpose of this post is to point out that if you have an “ownership interest” in an LLC, that property right is different than owning shares in a corporation.
If you have any questions about an LLC or an estate, please don’t hesitate to contact me.
[1] N.C.G.S. § 57D-1-103(15).
[2] Id.
[3] N.C.G.S. § 57D-3-01; 57D-3-03.
[4] N.C.G.S. § 57D-3-01(c).
[5] N.C.G.S. § 57D-1-103(11).
[6] N.C.G.S. § 57D-1-103(10).
[7] N.C.G.S. § 57D-3-20.
[8] Id.
[9] Id.
[10] N.C.G.S. § 57D-5-02.
[11] Blythe v. Bell, 2012 NCBC 60. This case was decided according to N.C.G.S. § 57C which has been repealed and superseded by N.C.G.S. § 57D.
[12] N.C.G.S. § 57D-5-01.
[13] N.C.G.S. § 28A-15-2.
[14] N.C.G.S. § 57D-3-02.
[15] Id.
[16] N.C.G.S. § 57D-3-03.