Even where the two members agree that the departing member is getting nothing for his interest, if the LLC has liabilities if the transaction results in a decrease in the departing member’s share of liabilities under the Internal Revenue Code, he or she will be deemed to have received a cash distribution, and the relinquishment of his or her interest is considered a sale or exchange.
Walking away from a partnership in this manner will result in a capital loss.
Generally state law prohibits an assignee from participating in business decisions or the operations of the LLC unless the articles or operating agreement provides otherwise.
If participation is allowed, any conditions provided by the corporate documents must be met.
Assigning a member's financial interest guarantees the lender a return on the investment while the member retains membership and whatever percentage of the financial interest not assigned.
Assignments are also made to satisfy existing personal debt or debt of the business.
Assignments are addressed by state law, and even though the specifics are left to the individual LLC's articles of organization and operating agreement, state law sets out the basic requirements for handing off a member's share of an LLC.
An LLC member may decide to assign a percentage of his membership interest to a lender as collateral for a loan.
Alternatively, state law may restrict any assignment except as allowed in either corporate document.
If assignment is not addressed in either corporate document, then assignments are either allowed or not based solely on the generalized statement found in the state's LLC statutes.