Many business entities, such as partnerships and limited liability companies, distribute fractional ownership interests that carry with them the right to profits and management authority. These interests can be sold, although the terms of transfer vary according to what type of entity is involved. In some cases, the transaction must comply with U.S. securities law.
A party with an interest in a business entity such as a partnership or an LLC holds several different types of rights and may assign all of them, subject to legal restrictions in some jurisdictions. These rights include the right to business profits, the rights to distribution of remaining assets when the business dissolves, the right to vote on company decisions and management authority. If a partnership agreement or LLC operating agreement exists, the assignee may be required to become a party to the agreement as a condition to receiving the interest.
The assignment of an interest in a partnership or LLC is generally regulated by the partnership agreement, because state laws allow partners considerable flexibility in determining the terms of an assignment. One popular restriction contained in many partnership agreements is the requirement that before assigning a general partnership interest to an outside party, the partner must first offer the interest to each partner. If each partner refuses the offer, the partner may transfer his interests to an outside party on terms no more favorable than the offer that was refused by the partners. Such terms include price, payment terms and rights granted. If the assignment agreement contains terms that contradict the terms of the partnership or LLC agreement, it will not be enforceable by either party.
Regulation D and Limited Partnership Interests
A limited partnership interest in a limited partnership is considered a security under federal law, and assignment of such an interest must comply with Securities and Exchange Commission (SEC) regulations. To assign the interest, the assignor must either register the interest with the SEC, a burdensome process that can cost several hundred thousand dollars, or qualify for an exemption under Regulation D. Regulation D exempts assignors from registration if the assignee is an "accredited investor," defined under Regulation D as either a company insider or an outside party with a statutory minimum net worth or annual income. An assignment agreement that fails to comply with SEC regulations cannot be enforced and can subject the assignor to civil and criminal penalties.
It is not necessary to always transfer all interests in a partnership or LLC. An assignor, for example, may assign only economic rights while retaining voting and management rights, subject to contrary state law. In addition, some partnership agreements and LLC operating agreements limit the ability of assignors to execute partial transfers.
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