What Is a Membership Interest Purchase Agreement?

A membership interest purchase agreement is a contract in which a buyer acquires some or all of the membership interests of a limited liability company (LLC) from one or more existing members. Rather than purchasing the LLC’s assets directly, the buyer acquires the ownership interests in the LLC itself, stepping into the shoes of the selling member or members. The LLC continues to exist as the same legal entity – with the same contracts, assets, liabilities, and employees – just with new or changed ownership.

Membership interest purchase agreements are also commonly used when the existing owners of a business buy out or sell to each other – for example, when one co-owner buys out another’s interest, or when a new partner purchases into the existing ownership structure.

Russo Law LLC represents buyers and sellers of LLC membership interests throughout New York and New Jersey. Whether you are acquiring a membership interest in an existing LLC or selling your ownership stake in a business, a well-drafted membership interest purchase agreement is essential to protect your interests.

What Does a Membership Interest Purchase Agreement Cover?

Identification of the interests being sold – the percentage or number of membership units being transferred and the resulting ownership structure after closing
Purchase price and payment terms – the total consideration, any purchase price adjustments, and payment structure including any seller financing or earnout provisions
Representations and warranties of the seller – the seller’s statements about the LLC, its financial condition, liabilities, contracts, and operations
Representations and warranties of the buyer – the buyer’s statements about its authority and ability to close the transaction
Pre-closing covenants – obligations of the parties between signing and closing, including operating the LLC in the ordinary course of business
Conditions to closing – what must occur before the transaction closes
Indemnification – the seller’s obligation to compensate the buyer for losses arising from breaches of representations or pre-closing liabilities
Non-compete and non-solicitation provisions – post-closing restrictions on the selling member

Membership Interest Purchase vs. Asset Purchase

Buying membership interests in an LLC is different from buying its assets. In an asset purchase, the buyer picks and chooses which assets and liabilities to acquire. In a membership interest purchase, the buyer acquires the entire LLC – including all of its existing liabilities, known and unknown. This is why thorough due diligence is especially critical in membership interest transactions, and why buyers typically negotiate robust representations, warranties, and indemnification provisions to protect against undisclosed liabilities.

Frequently Asked Questions – Membership Interest Purchases in New York and New Jersey

Does the LLC’s operating agreement affect the sale of membership interests?

Yes – significantly. Most LLC operating agreements contain transfer restrictions, rights of first refusal, and approval requirements that govern when and how membership interests can be sold. Before any membership interest transfer, the LLC’s operating agreement must be carefully reviewed to identify any restrictions or consent requirements. Failure to comply with the operating agreement’s transfer provisions can result in the purported transfer being void or voidable.

Can I sell my ownership interest in an LLC if there is no operating agreement?

Yes, in many cases. If all of the other members consent to the transfer, a membership interest can generally be sold even without a formal operating agreement in place. How that consent must be obtained, and what percentage of members must agree, depends on the ownership structure of the LLC and the default rules of the applicable state law – which in New York and New Jersey have their own requirements. The absence of an operating agreement can make the transfer process more complicated and underscores why having proper governing documents in place is important.

What other documents are typically signed alongside a membership interest purchase agreement?

A membership interest purchase agreement is the primary contract, but the closing typically involves additional documents. These commonly include a unanimous written consent of the other LLC members consenting to the sale, and an assignment of membership interest formally transferring the ownership units. If there was any dispute between the parties, the closing may also include a confidential settlement agreement and mutual releases. If the departing member is being paid over time, the closing package may also include a promissory note and related security documents to secure those deferred payments.

What due diligence should a buyer conduct before buying LLC membership interests?

In a membership interest purchase, the buyer is acquiring the entire LLC including all its liabilities. A thorough due diligence review typically includes examining the LLC’s financial statements, tax returns, existing contracts, outstanding litigation or claims, employment matters, intellectual property, real estate leases, and regulatory compliance. Russo Law LLC guides buyers through the due diligence process in connection with business acquisitions throughout New York and New Jersey.

The information on this page is general in nature and does not constitute legal advice. Every situation involves unique facts, and no specific strategy or recommendation can be made without a full review of your circumstances.

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If you are buying or selling LLC membership interests in New York or New Jersey, call 929-262-1101 or schedule a free consultation with Russo Law LLC.