A member of a Minnesota limited liability company (LLC) can transfer the right to receive the company’s distributions without anyone’s permission, unless the operating agreement restricts it. The buyer does not become a member, with a vote and a right to the company’s records, until the operating agreement’s admission process is followed or all the members consent. The company’s own documents record who owns it, because Minnesota articles of organization need not name the members.

These rules come from the Minnesota Revised Uniform Limited Liability Company Act, chapter 322C of Minnesota Statutes, and from the company’s operating agreement. Under Minn. Stat. § 322C.0110, subd. 2, “To the extent the operating agreement does not otherwise provide for a matter described in subdivision 1, this chapter governs the matter.” So the operating agreement comes first, and the statute fills the gaps. This page is written for a member selling or giving away an interest, a buyer, and the other members deciding whether to allow a transfer. It is part of my material on company control and governance.

What Do You Own When You Own Part of a Minnesota LLC?

An LLC owner holds two different things: membership, which carries management, voting, and information rights, and a “transferable interest,” which is only the right to receive distributions. A transfer moves the second one. The first stays behind unless the buyer is separately admitted.

Minn. Stat. § 322C.0102, subd. 28, defines the economic piece as “the right, as originally associated with a person’s capacity as a member, to receive distributions from a limited liability company in accordance with the operating agreement, whether or not the person remains a member or continues to own any part of the right.” Under Minn. Stat. § 322C.0501, “A transferable interest is personal property.” It can be sold, given away, pledged, or inherited like other personal property, subject to Minn. Stat. § 322C.0502, subd. 6: “A transfer of a transferable interest in violation of a restriction on transfer contained in the operating agreement is ineffective as to a person having notice of the restriction at the time of transfer.”

Membership is different. Subdivision 15 of § 322C.0102 defines a member as “a person that has become a member of a limited liability company under section 322C.0401 and has not dissociated under section 322C.0602.” That status is what lets a person vote, manage a member-managed company, and inspect the books.

The operating agreement that controls all of this may not be a single signed document. Subdivision 17 says it may be “whether oral, in a record, implied, or in any combination thereof, of all the members of a limited liability company, including a sole member.” Before any transfer, I suggest collecting every written amendment, member schedule, and consent, because each may be part of the agreement that governs the deal.

What Does a Buyer Get When a Member Sells an LLC Interest?

A buyer who is not admitted as a member gets the seller’s right to distributions, and nothing more. Before the dissolution and winding up of the company, that right reaches only the distributions the company decides to make. The buyer cannot vote, cannot manage, and cannot demand the company’s records. Minnesota partnership law treats a partner’s buyer the same way.

Minn. Stat. § 322C.0502, subd. 1, says a transfer “is permissible” and “does not by itself cause a member’s dissociation or a dissolution and winding up of the limited liability company’s activities.” The same subdivision says the transferee is not entitled to “participate in the management or conduct of the company’s activities” or to “have access to records or other information concerning the company’s activities.” Subdivision 2 gives the buyer the seller’s share of distributions: “A transferee has the right to receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled.”

Under Minn. Stat. § 322C.0404, subd. 2, “A person has a right to a distribution before the dissolution and winding up of a limited liability company only if the company decides to make an interim distribution,” and a buyer who is not a member has no vote on that decision.

The information gap is wide. Minn. Stat. § 322C.0410, subd. 6, states: “The rights under this section do not extend to a person as transferee.” The one exception comes at the end of the company’s life: “In a dissolution and winding up of a limited liability company, a transferee is entitled to an account of the company’s transactions only from the date of dissolution” (§ 322C.0502 subd. 3).

Minnesota partnership law has the same rule. Under Minn. Stat. § 323A.0503, a partner’s transfer “does not, as against the other partners or the partnership, entitle the transferee, during the continuance of the partnership, to participate in the management or conduct of the partnership business.” The page on transferring a partnership interest covers that side.

One difference matters to a buyer. A partnership transferee may go to court “to seek under section 323A.0801(6), a judicial determination that it is equitable to wind up the partnership business.” The LLC statute has no counterpart for a transferee: court-ordered dissolution under Minn. Stat. § 322C.0701, subd. 1, is available “on application by a member.” A buyer of economic rights alone cannot bring the oppression claim that a member can.

Chapter 322C reaches older companies too: under Minn. Stat. § 322C.1204, subd. 2, “on and after January 1, 2018, this chapter governs all limited liability companies,” except as subdivision 3 provides. For a company formed before August 1, 2015, the distribution share itself may differ. Under Minn. Stat. § 322C.1204, subd. 3, and subject to the operating agreement, “section 322C.0404, subdivision 1, does not apply to the limited liability company,” and distributions “must be allocated in proportion to the value of the contributions of the members reflected in the records required by item (i).” For those companies, the buyer’s share follows the contribution records, not a head count.

How Does a Buyer Become a Full Member of the LLC?

Outside a merger and the case where a company has no members left, a buyer becomes a member only “as provided in the operating agreement” or “with the consent of all the members.” Admission is a separate step from the sale, and the buyer takes on some of the seller’s known obligations when admitted.

Both phrases come from Minn. Stat. § 322C.0401, subd. 4. If the operating agreement is silent, one member can block admission by withholding consent. In a single-member company, the seller is the only member, so the seller’s own consent admits the buyer. I suggest putting that consent in the transfer documents, because an assignment alone moves only the distribution rights.

Admission carries a price. Under § 322C.0502 subd. 8, “When a member transfers a transferable interest to a person that becomes a member with respect to the transferred interest, the transferee is liable for the member’s obligations under sections 322C.0403 and 322C.0406, subdivision 3, known to the transferee when the transferee becomes a member.” Those are the seller’s unpaid contribution promises and the seller’s liability for a distribution taken knowing it was unlawful, which under Minn. Stat. § 322C.0406, subd. 3, applies “only to the extent that the distribution received by the person exceeded the amount that could have been properly paid under section 322C.0405.” A buyer should ask about both before closing, because the statute reaches the obligations “known to the transferee when the transferee becomes a member.”

I suggest also recording an admission in an amendment to the operating agreement and its member schedule, and by default that amendment takes every member’s consent. In a member-managed company, Minn. Stat. § 322C.0407, subd. 2, provides: “The operating agreement may be amended only with the consent of all members.” Subdivision 3 sets the same rule for a manager-managed company, where “The consent of all members is required to” amend the operating agreement.

What Happens to the Seller After Transferring an LLC Interest?

A seller who transfers an interest stays a member, with every duty of a member, until something else ends the membership. Selling the money rights does not, by itself, take the seller out of the company.

Under § 322C.0502 subd. 7, “when a member transfers a transferable interest, the transferor retains the rights of a member other than the interest in distributions transferred and retains all duties and obligations of a member.” A member who sold everything can still vote and still owes the duties a member owes.

The statute gives the remaining members a way to end that. Under Minn. Stat. § 322C.0602, clause (4), a member may be “expelled as a member by the unanimous consent of the other members if” there “has been a transfer of all of the person’s transferable interest in the company.” That clause excludes a pledge (“a transfer for security purposes”) and a charging order that has not been foreclosed. An operating agreement can also name its own trigger: a member is dissociated when “an event stated in the operating agreement as causing the person’s dissociation occurs.” The page on expelling an LLC member covers the rest of § 322C.0602.

A seller should not simply announce a withdrawal to get out. Minn. Stat. § 322C.0601, subd. 2, lists the grounds that make a dissociation wrongful. Under that subdivision, a dissociation that “is in breach of an express provision of the operating agreement” is wrongful. So is a withdrawal before the company ends, when “the person withdraws as a member by express will,” as the statute puts it. Under subdivision 3, a member who wrongfully dissociates “is liable to the limited liability company and, subject to section 322C.0901, to the other members for damages caused by the dissociation.” I suggest that the transfer documents state when the seller’s membership ends, signed by the other members, because that removes the question.

Once a seller is dissociated, Minn. Stat. § 322C.0603, subd. 1, says “the person’s right to participate as a member in the management and conduct of the company’s activities terminates.” Under subdivision 2, “A person’s dissociation as a member of a limited liability company does not of itself discharge the person from any debt, obligation, or other liability to the company or the other members that the person incurred while a member.”

How Can an Operating Agreement Restrict or Block a Transfer?

An operating agreement can require consent, give the company or the other members the first chance to buy, or force a sale when a set event happens. A transfer that ignores a restriction is ineffective against any person who had notice of the restriction when the transfer happened.

The enforcement rule is § 322C.0502 subd. 6: “A transfer of a transferable interest in violation of a restriction on transfer contained in the operating agreement is ineffective as to a person having notice of the restriction at the time of transfer.” A buyer who has seen the operating agreement has notice of its restrictions, so I suggest the buyer confirm that every required consent or waiver is signed before paying.

An operating agreement can include transfer clauses such as these:

  1. Consent requirement. No transfer without approval of the manager, the board, or a stated share of the members.
  2. Right of first refusal. The company or the other members may match an outside offer before the seller can accept it.
  3. Mandatory sale on a trigger. Death, disability, divorce, termination of employment, or retirement requires the member to sell at a set price or formula.
  4. Valuation and payment terms. Who picks the appraiser, which discounts apply, and whether the price is paid in cash or over time.

The fourth item is where an agreement can quietly favor one side. I once analyzed an operating agreement under which a member who stepped back from active work was treated as offering to sell every unit. The buying member chose the appraiser alone, and could pay 20% down with the balance on an unsecured five-year company note. By the time of an exit, changing those clauses takes the consents § 322C.0407 or the agreement itself requires. The page on a buy-sell agreement covers how to write them in advance, and the page on what belongs in an operating agreement covers the rest of the document.

Restrictions have limits. A member exercising a consent right must act under Minn. Stat. § 322C.0409, subd. 4, “consistently with the contractual obligation of good faith and fair dealing, including acting in a manner, in light of the operating agreement, that is honest, fair, and reasonable.” In a manager-managed or board-managed company, § 322C.0410 subd. 2 adds that before a member gives or withholds a consent, “the company shall, without demand, provide the member with all information that is known to the company and is material to the member’s decision.”

In a member-managed company, § 322C.0410 subd. 1 requires the company to furnish each member, “without demand, any information concerning the company’s activities, financial condition, and other circumstances which the company knows and is material to the proper exercise of the member’s rights and duties under the operating agreement or this chapter, except to the extent the company can establish that it reasonably believes the member already knows the information,” and that duty “also applies to each member to the extent the member knows any of the information.” Section 322C.0110 subd. 3 also bars an operating agreement from provisions that “unreasonably restrict the duties and rights stated in section 322C.0410.”

What Steps Complete an LLC Ownership Transfer in Minnesota?

I suggest documenting a transfer with a signed assignment, any consents the operating agreement requires, written admission of the buyer if the buyer is to be a member, notice to the company, and an updated operating agreement. A Secretary of State amendment is needed when information in the company’s articles of organization “has become inaccurate owing to changed circumstances.”

  1. Read the operating agreement and every amendment. Its transfer clauses govern, and the statute fills the gaps. For a company formed before August 1, 2015, Minn. Stat. § 322C.1204, subd. 3, provides that “the language in the articles of organization, and any bylaws, operating agreement, or member control agreement” of the company “will operate as if that language were in the operating agreement of the limited liability company when it becomes subject to this chapter.”
  2. Do the diligence before signing. A buyer who is not yet a member has no right to the company’s records under § 322C.0410 subd. 6, so I suggest getting financial statements, tax returns, debts, and contribution records as a condition of the deal.
  3. Get the required consents or waivers in writing. That includes any right-of-first-refusal waiver.
  4. Sign a written assignment of the transferable interest. Under § 322C.0102 subd. 27, a transfer “includes an assignment, conveyance, deed, bill of sale, lease, mortgage, security interest, encumbrance, gift, and transfer by operation of law.” I suggest a signed assignment separate from the purchase agreement, because it gives the company one document showing what interest moved and to whom.
  5. Admit the buyer as a member, if that is the deal. Admission follows the operating agreement or the consent of all the members under § 322C.0401 subd. 4.
  6. Give the company written notice. Under § 322C.0502 subd. 5, “A limited liability company need not give effect to a transferee’s rights under this section until the company has notice of the transfer.”
  7. Update the operating agreement and member schedule. The amendment needs the consents the agreement or § 322C.0407 requires.
  8. Check the Secretary of State record. Articles of organization must state the company’s name, “the street address of the initial registered office,” the name of any agent for service of process the company has, and “the name and street address of each organizer” (Minn. Stat. § 322C.0201, subd. 2). They need not list members. Some articles do contain optional information, such as member names. If a transfer makes that information wrong, Minn. Stat. § 322C.0202, subd. 5, applies. The member, manager, or governor who knows of it must act “promptly” and “cause the articles to be amended.” The annual renewal under Minn. Stat. § 322C.0208 states “the name and business address of the officer or other person exercising the principal functions of the president of a nonprofit corporation, manager of a limited liability company, or chief executive officer of a corporation or cooperative” (Minn. Stat. § 5.34), so that line changes only if the manager changes.

The order matters because the public record does not prove ownership. A buyer once asked me to look at a purchase where the purchase agreement required the seller to deliver a signed assignment of the membership interest at closing. No assignment had been signed, yet an amendment filed with the Secretary of State already named the buyer as the company’s sole member. Under Minn. Stat. § 322C.0112, subd. 4, when a filed record conflicts with the operating agreement, “the operating agreement prevails as to members, dissociated members, transferees, managers, and governors.” The same subdivision provides that “the record prevails as to other persons to the extent they reasonably rely on the record.” For a buyout among existing members, the page on member buyout procedures covers pricing and payment. My other material on LLC ownership and governance covers the steps that follow.

What Happens to an LLC Interest When a Member Dies?

A member’s death ends that person’s membership. The estate keeps the right to distributions as a transferee, with information rights for settling the estate, but no vote unless the operating agreement or the remaining members admit someone.

Under § 322C.0602, an individual is dissociated when “the person dies.” Section 322C.0603 subd. 1 then provides that “any transferable interest owned by the person immediately before dissociation in the person’s capacity as a member is owned by the person solely as a transferee.” Minn. Stat. § 322C.0504 gives the estate’s representative more than an ordinary buyer gets: “If a member dies, the deceased member’s personal representative or other legal representative may exercise the rights of a transferee provided in section 322C.0502, subdivision 3, and, for the purposes of settling the estate, the rights of a current member under section 322C.0410.”

Any contribution the member had promised survives. Under Minn. Stat. § 322C.0403, subd. 1, “A person’s obligation to make a contribution to a limited liability company is not excused by the person’s death, disability, or other inability to perform personally.”

A single-member company faces a sharper problem. Section 322C.0401 subd. 4 lets “the last person to have been a member, or the legal representative of that person,” designate a new member. That designation must happen “within 90 consecutive days after the company ceases to have any members.” Designation alone does not admit anyone: the same clause also requires that “the designated person consents to become a member” within that period. If no one is admitted, § 322C.0701 subd. 1 dissolves the company upon “the passage of 90 consecutive days during which the company has no members.” I suggest that the personal representative read the current text of both sections at the start of the estate, because § 322C.0701 dissolves the company once 90 consecutive days pass without a member. Under Minn. Stat. § 322C.0702, subd. 1, “the company continues after dissolution only for the purpose of winding up.”

For a multi-member company, the default leaves the family holding distribution rights in a company it cannot manage, and the surviving members with a partner’s heirs they did not choose. I suggest a death trigger in a buy-sell agreement, with a price formula and a way to fund it, because it settles both problems before they arise.

How Does a Divorce Affect a Member’s LLC Interest?

In a Minnesota divorce, the court divides marital property, which can include an LLC interest. A spouse who receives part of the interest gets distribution rights only, unless admitted as a member under the operating agreement or by all the members.

Under Minn. Stat. § 518.58, subd. 1, “the court shall make a just and equitable division of the marital property of the parties without regard to marital misconduct, after making findings regarding the division of the property.” The same subdivision sets the default valuation date: “The court shall value marital assets for purposes of division between the parties as of the day of the initially scheduled prehearing settlement conference, unless a different date is agreed upon by the parties, or unless the court makes specific findings that another date of valuation is fair and equitable.” For a business whose value moves quickly, the next sentence matters too: “If there is a substantial change in value of an asset between the date of valuation and the final distribution, the court may adjust the valuation of that asset as necessary to effect an equitable distribution.”

The LLC statute’s definition of “transfer” in § 322C.0102 subd. 27 includes a “transfer by operation of law.” An interest awarded to the non-member spouse therefore follows the transferee rules in § 322C.0502. An operating agreement can include a divorce trigger, one of the clauses listed above, requiring a sale of any interest awarded to the non-member spouse.

A member considering a divorce should be careful with company dealings while it is pending. Subdivision 1a provides that “each party owes a fiduciary duty to the other for any profit or loss derived by the party, without the consent of the other, from a transaction or from any use by the party of the marital assets.” The duty runs “During the pendency of a marriage dissolution, separation, or annulment proceeding, or in contemplation of commencing” one.

Federal tax law can take the tax cost out of a transfer between spouses. Under 26 U.S.C. § 1041(a), “No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)” a spouse, or “a former spouse, but only if the transfer is incident to the divorce.” The statute has exceptions, including for a nonresident alien spouse. The receiving spouse takes over the old tax basis: “the basis of the transferee in the property shall be the adjusted basis of the transferor.”

How Is the Sale of an LLC Interest Taxed?

The answer depends on how the LLC is taxed. For an LLC taxed as a partnership, the seller recognizes gain or loss, generally capital. For an LLC taxed as an S corporation, a sale to the wrong buyer can end the S election for everyone.

For an LLC taxed as a partnership, 26 U.S.C. § 741 provides: “In the case of a sale or exchange of an interest in a partnership, gain or loss shall be recognized to the transferor partner.” The gain is capital “except as otherwise provided in section 751 (relating to unrealized receivables and inventory items).” Section 751 is the exception for unrealized receivables and inventory items, and your CPA can tell you whether it reaches your company. A buyer from a “nonresident alien individual or foreign corporation” has its own federal duty when the seller’s gain falls under 26 U.S.C. § 864(c)(8). Under 26 U.S.C. § 1446(f), “the transferee shall be required to deduct and withhold a tax equal to 10 percent of the amount realized on the disposition,” unless the seller furnishes “an affidavit by the transferor stating, under penalty of perjury, the transferor’s United States taxpayer identification number and that the transferor is not a foreign person.” If the buyer does not withhold, “the partnership shall be required to deduct and withhold from distributions to the transferee a tax in an amount equal to the amount the transferee failed to withhold (plus interest under this title on such amount).”

For an LLC that has elected S corporation status, the identity of the buyer matters. A company fails the federal “small business corporation” test if it has “a nonresident alien as a shareholder” or has “as a shareholder a person (other than an estate, a trust described in subsection (c)(2), or an organization described in subsection (c)(6)) who is not an individual” (26 U.S.C. § 1361(b)(1)). Under 26 U.S.C. § 1362(d)(2), the election ends whenever “such corporation ceases to be a small business corporation.” A sale of an S corporation LLC’s interest to another company, or to a buyer who is a nonresident alien, can therefore cost every owner the election. I suggest an S corporation LLC’s operating agreement bar transfers to ineligible owners, because § 322C.0502 subd. 6 then makes such a transfer ineffective against a buyer with notice.

A gift of an LLC interest can also require a federal gift tax return. 26 U.S.C. § 6019 requires a return from an individual who “makes any transfer by gift” unless the gift falls within one of that section’s exceptions. One of those exceptions is the annual exclusion in 26 U.S.C. § 2503(b). For gifts “other than gifts of future interests in property,” it provides that “the first $10,000 of such gifts to such person shall not, for purposes of subsection (a), be included in the total amount of gifts made during such year.” For gifts made in a calendar year after 1998, § 2503(b)(2) provides that the $10,000 amount “shall be increased by an amount equal to” a cost-of-living adjustment.

I suggest having your CPA run the numbers on a planned sale before the price is set, because the tax result can change what a given price is worth to each side.

Can I sell my LLC interest without the other members agreeing?

You can sell the right to your share of distributions without their agreement, unless the operating agreement restricts transfers. Minn. Stat. § 322C.0502 subd. 1 makes a transfer permissible by default, and subd. 6 makes a transfer that violates an operating-agreement restriction ineffective against anyone who had notice of the restriction. Your buyer becomes a member only as the operating agreement provides or with the consent of all the members under Minn. Stat. § 322C.0401 subd. 4, so without that step the buyer gets money rights but no vote.

Does a member's personal creditor get a vote in the LLC?

No. A creditor with a judgment against one member can ask a court for a charging order under Minn. Stat. § 322C.0503, which is a lien on that member’s transferable interest and requires the company to pay the creditor the member’s distributions. If distributions will not pay the judgment within a reasonable time, the court may order the interest sold, and the sale’s buyer obtains only the transferable interest and does not become a member. Under subdivision 7, that section provides the exclusive remedy by which a judgment creditor may satisfy the judgment from the member’s transferable interest.

Is my name on the Secretary of State record proof that I own the LLC?

No, not among the owners. Minn. Stat. § 322C.0201 subd. 2 does not require the articles of organization to name the members, and the annual renewal under Minn. Stat. § 5.34 names the manager. Among members, transferees, and managers, Minn. Stat. § 322C.0112 subd. 4 says the operating agreement prevails over a conflicting filed record, while the record prevails as to other persons to the extent they reasonably rely on the record. Ownership is proved by the operating agreement, the member schedule, and signed assignments and consents, so I suggest keeping those signed and together.

Can I give part of my LLC to my children?

Yes. Minn. Stat. § 322C.0102 subd. 27 defines a transfer to include a gift, so a member may give part of the transferable interest unless the operating agreement restricts it. Your children receive only the right to distributions. They become members, with a vote and information rights, only as the operating agreement provides or with the consent of all the members under Minn. Stat. § 322C.0401 subd. 4, so I suggest deciding in the gift documents whether to admit them. The gift can also require a federal gift tax return under 26 U.S.C. § 6019.

Do the old LLC rules still apply to a company formed before August 2015?

Partly. Minn. Stat. § 322C.1204 subd. 2 makes chapter 322C govern all Minnesota LLCs on and after January 1, 2018. For a company formed before August 1, 2015, subdivision 3 keeps contribution-based defaults, subject to the operating agreement: distributions and voting power are in proportion to the value of the members’ contributions shown in the company’s records, rather than the equal-shares default newer companies have. A buyer of an older company’s interest should read those contribution records before pricing the deal.

Will a later amendment to the operating agreement bind someone who bought only the economic rights?

Yes, by default. Minn. Stat. § 322C.0112 subd. 2 makes an amendment adopted after a person becomes a transferee effective as to the company’s and the members’ obligations to that transferee, and a buyer not admitted as a member has no vote on it. Subdivision 1 lets the operating agreement require a nonparty’s approval of amendments, but adding that term is itself an amendment, and under Minn. Stat. § 322C.0407 the operating agreement by default “may be amended only with the consent of all members.” I suggest the buyer get that amendment signed by every member before closing.

Next Steps for a Planned LLC Transfer

Before anyone signs, I suggest reading the operating agreement’s transfer clauses, deciding whether the buyer is to be admitted as a member, and confirming how the company is taxed, because each of those changes what the buyer receives. A member’s personal creditor is a different case: under Minn. Stat. § 322C.0503, subd. 7, “This section provides the exclusive remedy by which a person seeking to enforce a judgment against a member or transferee may, in the capacity of judgment creditor, satisfy the judgment from the judgment debtor’s transferable interest.” The page on charging orders covers that process.

If you are planning a sale, purchase, or gift of an LLC interest and want to know whether your operating agreement allows it and what the other side would receive, email [email protected] with a short description of the deal.