‘When’ And ‘Where’ Does One Become A Member Of An LLC?
Fundamental information gathering requires one to answer questions relating to who, what, when, where, why, and how. In past postings, I have discussed the ‘how’ of acquiring an LLC membership (see, for example: An LLC Issued Me a K-1. What Am I?). As it stands, acquiring membership interest in an LLC rests on a host of factors. This week we will examine the ‘when’ and ‘where’ questions relating to acquiring a membership interest in an LLC.
When Can a Person Become a Member?
Consider the following situations:
- The Initial Member
According to Washington’s LLC Act, one can become an “initial member” at three distinct times.
First, a person can become a member upon LLC formation (RCW 25.15.116(1(a)). The Act refers to becoming an “initial member.”
“In connection with the admission of the initial member … of a limited liability company, a person is admitted as a member upon the later to occur of: …. The formation of the limited liability company….”
It is interesting to note that there are no prerequisites to the admission such an “initial member” upon formation. The “how” is, in this case, left out.
Second, if still referring to the admission of an “initial member”, the Act provides that a person can become a member when the LLC agreement says so (RCW 25.15.116(1(b)).
“In connection with the admission of the initial member … of a limited liability company, a person is admitted as a member upon the later to occur of: …. the time provided in the limited liability company agreement….”
Third, one can become an initial member when it becomes reflected in the LLC’s records (RCW 25.15.116(1(b)).
“In connection with the admission of the initial member … of a limited liability company, a person is admitted as a member …. when the person’s admission is reflected in the records of the limited liability company.”
The term “record” is defined by the Act in 25.15.006. In addition, 25.15.136 discusses “the records” the LLC must keep. It is not clear what “records of the limited liability company” 116 is referring to, but I assume it refers to any “records” of the LLC.
- After the Initial Member
Washington’s LLC Act goes on to provide that a person can be admitted as a member “after the admission of the “initial member”” 25.15.116(2). This portion of the ‘when’ answer is not much help.
Where Can a Person Get a Membership?
One can acquire a membership interest from two sources:
First, a person can acquire a membership interest (after the admission of the initial member) from the LLC itself (RCW 25.15.116(2(a)).
Second, a person can acquire a membership interest if they first become a “transferee”, so long as the transferee complies with the procedures for acquisition of the membership interest identified in the LLC agreement. If no such agreement exists, then the transferee can acquire a membership interest (it is not clear from whom) upon the unanimous consent of the members (RCW 25.15.116(2(b)). The Act defines a “transferee” as a person “to which all or part of a transferable interest has been transferred…”
Considerations
It appears the ‘when’ of LLC membership interest matters, as does ‘where’ a person acquires their membership interest. Becoming an “initial member” (presumably from the LLC) upon formation of the company seems to be easiest. A question that has always troubled me, however, is if an LLC is formed but does not have a member upon formation, is such a “thing” an LLC? A host of metaphysical issues arise from such a question. Interesting questions also appear in the context of opinion letters, such as whether the typical “the company is validly formed” or “the company is validly existing” opinions can even be issued if an LLC was formed without a member. In conclusion, the ‘when’ and the ‘where’ of the acquisition of an LLC membership interest matter.
To learn more about LLC membership, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.