While LLCs don’t issue “stock,” they use a similar document, called a membership certificate. Here I’ll discuss everything you need to know about LLC Membership Certificates.
What is an LLC Membership Certificate?
Just like the stock shares in corporations, certificates are issued to LLC members that specify their claim in the LLC. The membership certificate of an LLC is a compulsory document for corporate ledgers and LLC registers, as they help with increasing the reputation of an LLC.
Membership certificates of an LLC also help to structure its management, profits, and taxation. Each certificate that is issued is signed by the secretary of the LLC, and these signatures are often accompanied by the witness, which is often another member of the LLC.
For an LLC, it is paramount to define the limit of membership units and then allocate those units based on the capital contribution of each member of the LLC. Furthermore, operating agreements of LLCs also usually describe the nature of certificates and the roles that they can play in the management of the LLC.
When does an LLC Need to Issue Membership Certificates?
There is no legal say on when to issue membership certificates. Under the law, even issuing the membership certificates isn’t required, as the equity share is defined in the operating agreement of the LLC. For the record purposes of issuing certificates to each member, a membership transfer ledger is used.
Hence, the members of an LLC don’t need a membership certificate to assert their claim on their membership share. However, LLCs issue membership certificates to make things easier, especially for the record-keeping, and in case if there is any legal battle. Furthermore, issuing membership certificates is a good approach when LLC tries to raise capital by selling multiple smaller interests in it.
The parameters of LLC membership certificates are defined in the operating agreement of the LLC. If the operating agreement has defined a particular stage or time on issuing the membership certificates, it should be followed. Otherwise, there is no restriction on when and if to issue the membership certificates.
What Does an LLC Membership Certificate Include?
There are multiple parts of a membership certificate that are conventionally included in it. However, there is no legal template for an LLC membership certificate that needs to be followed.
The membership certificate of your LLC should include all the basic information, like the name of your LLC and the state of incorporation. Furthermore, other basic information of the LLC, like the number of members in your LLC and the name and exact percentage of the equity of the member to whom the membership certificate is being issued, should also be included in the membership certificate.
Once we move from the basic requirements of the LLC membership certificate to the secondary requirements, there should be signatures on it. Generally and conventionally, the signatures of the manager of the LLC are used on the membership certificate.
However, since it is not a legal requirement, and there is no legal template to follow, some LLCs go as far as having the signatures of a witness and of the member to whom the certificate is being issued, along with the signatures of the manager of the LLC.
The second point to consider in the secondary requirements is to mention the transfer rights on the membership certificate. Your membership certificate should include an inscription that clearly states the transfer rights of the certificate.
It is a very important point to consider, and even if the certificate is running low on space, you should have this inscription on the backside of the certificate. The primary purpose of this inscription is that if the membership interest is then transferred to a third party, the person receiving it should know the basic restrictions.
General inscriptions that are included in a membership certificate are that the LLC shares aren’t registered under any federal or state laws. Hence they don’t hold the legal standing of shares of corporations.
Creating Membership Certificates
There are multiple online services that can help you with creating the membership certificate for your LLC, or you can create the membership certificate yourself. Since there is no legal constraint to follow in creating your membership certificates, you can design them the way you want but should be wary about including all the vital points of information.
Usually, when you are creating a membership certificate, you should include these points:
- Name of the LLC
- State of incorporation of the LLC
- Number of members of the LLC at the time of issuance of the certificate
- Date when the certificate is issued
- Name of the member to whom the certificate is being issued
- Percentage of ownership of the respective owner
- All the benefits that the member is entitled to by having the certificate
- Signatures of an authorized member and a witness
The evolution of membership certificates over the years has also shown us that there are membership certificates issued by the LLCs that contain a bill of sale section that documents the sale of ownership interest. The information included in it is often the sale amount, date of sale, name of the new owner, and signature of an LLC authority that authorized the sale.
Again, it is important to know here that the transfer of membership interests of the LLC is always subject to the rules and regulations that you have specified in the operating document of your LLC. It is always recommended that LLC owners/members create and maintain a separate member list and transfer ledger that keeps a record of all the current memberships.
Is it Necessary to Keep a Certificate/Stock Ledger?
Before we move on to answer the question, we need to understand what a stock ledger, and why it is a critical ledger when it comes to your LLC. The stock ledger of your LLC is a ledger that allows you to keep a precise and accurate record of all the stock transactions of your LLC and is a critical and mandatory element of the records book of your LLC.
Any transaction regarding the stock of your LLC, whether they are the initial issuance of certificates or any subsequent transfer of certificates in your LLC, must be entered in the certificate/stock ledger. While in corporations, it is often known as the stock transfer ledger or a corporate stock ledger, in LLCs, it is usually referred to as a certificate ledger.
While some states legally require you to keep a certificate ledger of every certificate that your LLC has issued in the company records book, it is always a necessary document, even if your state doesn’t require you to keep a certificate ledger. There is no other document in your record books that keeps a regular track of your certificates’ transactions, so you should never miss on the certificate ledger, which provides you with a good opportunity to record every certificate transfer.
How to Add New Membership Units?
After the foundation of your LLC, you are always faced with the problem of removing existing members and adding new members to your LLC. While adding new members into your LLC offers many benefits, you should always be careful about the benefits of existing members and should add new members only if it offers financial benefits to the existing members.
Before you move to add new members to your LLC, you require a unanimous affirmative vote of the existing members of your LLC. It is a mandatory requirement since when you add new members, the interest of the existing members will dilute. Every existing member of an LLC has the legal right to stop the addiction to avoid financial dilution. It ensures that the addition of new members is only possible when it offers a greater financial interest to the existing members of your LLC.
Contrary to diluting ownership stakes of the existing members, adding new members to your LLC via the issuance of fresh membership units can prove to bring a more positive impact on existing members as well as on the overall situation of the LLC.
For example, if you have a PLLC for providing legal services, it is a smart move to bring a new legal expert that will bring you more expertise and a new client list. In this way, all the existing members of your professional LLC will benefit, as the addition of a new member is expanding the business of your LLC.
To add new membership units, the operating agreement of your LLC should clearly state the type of consideration that will be paid for the new membership interests. Usually, this consideration is cash, but it can also come in the form of kind, like the transfer of assets or provision of services.
Furthermore, for issuing new membership units, it is also important that you have all the required evidence that confirms that payment of the consideration has been made in cash or kind. In case of non-cash consideration, you would also need to formulate a new written agreement between the member and your LLC that legally obligates the member to pay the promised specified consideration.
Other Types of LLC Certificates
Apart from certificates of membership, there is a list of certificates that is vital to the function of your LLC. Some of those LLC certificates are:
- Certificate of Organization
For an LLC, the certificate of organization is a legal document that is filed with the secretary of state in the majority of states to create an LLC. You may know this certificate with the name of the certificate of formation, as well. The requirements to fill and file for a certificate of organization will vary from state to state.
- Certificate of Good Standing
Usually also known as the “Certificate of Authorization” or “Certificate of Existence,” it is a document that every state issue that shows that your LLC has met all of its statutory requirements and hence has been authorized to conduct business in the given state.
- Certificate of Incumbency
It is a certificate issued by the LLCs that lists the names and other details of all of its current members, directors, managers, and in some cases, key stakeholders. It is not required by law to list the ex-members and other ex-stakeholders in the LLC.
Frequently Asked Questions:
In this section, we have listed some of the frequently asked questions regarding the LLCs and their various certificate.
- Can a corporation be a member of an LLC?
Yes, a corporation can be a member of an LLC without any complicated legal process. All states allow all kinds of business entities, including corporations, to be a part of an LLC. For a corporation, it even doesn’t have to be registered in the same state as that of the LLC.
- What happens if the membership certificate is lost?
If a membership certificate is lost by a member of an LLC, the LLC can issue a new certificate after the member has signed a statement that verifies on the part of the member that the lost certificate has not been transferred or sold. The member who has applied for the new certificate should also sign an indemnity agreement that releases the LLC from all the issues related to the liability of issuing a new certificate.
- What documents should your LLC have?
While there are many secondary and tertiary documents, the primary documents that are a must-have for LLCs are the articles of organization, the operating agreement, and the employee identification number.
- Should your corporation provide stock certificates to shareholders?
The majority of states do not always require a corporation to issue a paper stock certificate. However, that is possible if the board of corporations can authorize all the issuance of certificates with certificates. Hence, in modern times, stock certificates have been replaced with electronic or paper ledger entries.
- Why are legends required, and how to print them on share certificates?
The legend of a stock underlines all the restrictions and conditions that can help a corporation to prevent their shares from being sold too soon – thus protecting the corporation from harm.
While usually they are printed on the front of shares, sometimes, there is not much space on the front side of the share, and they are printed on the backside of the share. The legend usually can be found on shares written as ”TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS RESTRICTED. SEE LEGEND ON REVERSE SIDE’’.
