What Is An LLC Membership Certificate?

What Is An LLC Membership Certificate?

LLC membership certificates look like stock certificates issued by a corporation, however, they do not function in the same way. The certificate lists the name of an LLC member and details their ownership interest in the company. 

The law does not require LLCs to issue membership certificates. This is because these certificates  do not represent an official record. The LLC Operating Agreement is still the official record of ownership even if the company issues membership certificates. The LLC Operating Agreement will control in the event of any conflict with information presented on a membership certificate. LLC owners often do not use membership certificates as a result.

Some instances may require an LLC to issue membership certificates. One example is when an LLC Operating Agreement has UCC Article 8 opt-out language that confers the membership certificate legal status making it evidence of ownership. The Delaware LLC Act and Uniform Commercial Code require possession by a secured lender of a member’s certificate to perfect security interest in collateral. This is often the case for types of hybrid debt, such as mezzanine financing. 

Members cannot issue membership certificates in blank name to the bearer. Delaware requires owners of an LLC to know at all times who the members. 

Benefits of LLC Membership Certificates

One benefit of LLC membership certificates is that they list ownership interest as individual units rather than percentages. The LLC Operating Agreement traditionally divides ownership on a percentage basis. For example, an LLC with two equal members would allocate 50% ownership to each member. 

Percentage based ownership is fairly straightforward when dividing between two or three members. However, percentage ownership becomes increasingly difficult to manage as more members are added or removed. Membership units make members feel like they own something tangible when they receive a membership certificate.

LLC Membership Certificate Pitfalls

LLC membership certificates are not official records of ownership and do not function like corporate stock. A membership certificate can make an LLC member feel more like an owner. This can often mislead members to think they can transfer a certificate simply by endorsing the back. 

The LLC Operating Agreement often makes endorsing membership more complicated by imparting specific restrictions. Members put these restrictions in place to prevent the hostile takeover of a company by an unwanted individual. 

LLC Operating Agreements typically have “pick-your-partner” provisions. These provisions provide that the other LLC members must first approve an ownership transfer before voting rights are conferred to a new member. Many LLC Operating Agreements also include a “right of first refusal” as another barrier to ownership transfer. A right of first refusal grants the company first, and then the other members themselves, the right to buy the interest before it can be transferred. 

Do LLCs Have Stock?

An LLC does not have stock. LLC ownership is more like a partnership where owners agree on how they will divide the ownership pie. 

LLC owners have complete “freedom of contract” under their private Operating Agreement. This allows them to arrange company ownership any way they decide. This includes differing capital contributions plus unique arrangements for distributions to members. An LLC can even create different classes of ownership units. Classes can account for different voting rights and privileges that members may have in an organization.

If you can dream it, you can do it in the Operating Agreement, provided it is understood between all members.

How To Create LLC Membership Certificates

LLC membership certificates should identify the following:

• The name of the company,
• The state of formation,
• The total amount of units authorized under the LLC Operating Agreement,
• The name of the member,
• The allocated units or ownership percentage issued to the member,
• Any transfer restrictions that may be necessary to declare on the certificate,
• Signatures of an LLC’s officers or managers.

Membership certificates can include a legend. The legend indicates any restrictions imposed on the member’s right to transfer ownership. The legend can be located either on the face or the back of the certificate. 

The certificate can also acknowledge any contractual obligations the interests are subject to upon being transferred or sold. An LLC member is expected to be aware that their ownership rights are based on the Operating Agreement, not just a certificate. 

The LLC’s secretary or manager typically sign the membership certificate. Authorized membership certificates must be consistent with the Operating Agreement.

The law does not require LLCs to issue membership certificates. These certificates however are sometimes provided to members who are less involved in the day-to-day operations of the business. Although membership certificates are one way to further memorialize ownership interest through additional, physical documentation, the internal Operating Agreement remains the principal oracle that is dispositive of who are the owners.

Do LLC Membership Certificates Have to Be Notarized?

No, LLC Membership Certificates do not have to be notarized. LLC Membership Certificates are not like stock certificates. They are usually not recommended because it may suggest someone has rights outside the Operating Agreement. If you decide to use Membership Certificates, they are not notarized.

How Many LLC Membership Certificates Can You Issue?

There is no limit to the number of LLC Membership Certificates that you can issue. However, the Operating Agreement sets forth the members of the Limited Liability Company (LLC). There is also no cap on the number of members in an LLC. Sometimes, LLCs also prepare LLC Membership Certificates that are given out to its members. These LLC certificates are neither recommended nor common.

Can You Sell an LLC Membership Certificate?

You can sell membership interest as outlined in an Operating Agreement, but the membership certificate itself isn’t like a stock certificate that can simply be endorsed. An LLC usually has restrictions on transfer, assignment, and admission of new Members.

Who Makes an LLC Certificate?

A Delaware LLC begins when its Certificate of Formation is filed with the Delaware Division of Corporations. The Members then agree upon and usually sign an LLC Operating Agreement

It is optional for an LLC to prepare and distribute to its Members the ownership certificates known as Membership Certificates or LLC Certificates. Most LLCs do not use Membership Certificates because the ownership is derived from contract and not possession of an ownership Certificate.

If you do want Membership Certificates to be prepared and distributed, they can be ordered separately when you order a Compliance Kit which comes with blank certificates only printed with the LLC’s name.

Is an LLC Certificate A Legal Document?

Usually, an LLC Ownership Certificate is not considered a legal document. The ownership interest is merely representative of rights in the LLC Operating Agreement and holding a separate LLC Certificate showing ownership should not increase or decrease the rights of a Member stated in the LLC Operating Agreement.

In advanced financing transactions it is possible for an LLC Operating Agreement to “opt out” of UCC Article 8 where an LLC Certificate can be pledged as collateral to a lender in Mezzanine financing transactions.

Why Do I Need an LLC Membership Certificate?

An LLC membership certificate provides a written record of a member’s ownership interest in the company. Although membership certificates are generally optional and not required by Delaware law, they can be further evidence of ownership, consistent with the Operating Agreement.

Be careful because the Operating Agreement is the official record of ownership and a member certificate would not grant ownership without that member also being in the Operating Agreement.

A membership certificate can be especially helpful for multi-member LLCs because it gives each member a tangible record of their ownership. It may also help establish a clear record of ownership when the LLC brings in a new member, transfers an interest, or works with a lender or investor.

The LLC membership certificate does not replace the Operating Agreement. The Operating Agreement generally governs the members’ ownership interests, rights, and responsibilities. The information on a membership certificate should be consistent with the Operating Agreement and the LLC’s other ownership records.

In special use cases, the Operating Agreement can “opt-out” of Article 8 of the UCC and give a membership certificate possession certain rights, like collateral to hold by a lender to support special mezzanine funding for large commercial loans.

Who Gets a Copy of an LLC Membership Certificate?

If an LLC issues membership certificates, each member typically receives a certificate showing their ownership interest in the company. The certificate would identify the member’s name, ownership percentage, or number of membership voting or non-voting units.

The LLC should also keep a copy of each issued certificate with its business records. The certificates should match the LLC’s Operating Agreement and accurately reflect each member’s ownership interest.

Most LLCs do not issue membership certificates. They are generally not recommended because they can be misleading to suggest someone is an owner when their ownership is actually controlled by the Operating Agreement. The Operating Agreement remains the primary document governing LLC ownership.

Is an LLC Membership Certificate Required?

An LLC membership certificate is not required in most states, including Delaware. Unlike corporations, which use stock certificates to represent ownership, LLCs document ownership through the LLC Operating Agreement and LLC’s accounting records.

Although not usually thought to have legal significance, some LLCs choose to issue membership certificates as a way to make members feel they own something tangible to reflect their record of ownership. An LLC membership certificate usually identifies:

• The member’s name,
• Ownership interest (such as voting or non-voting),
• Number of membership units,
• Date issued,
• And other details that confirm the member’s rights in the company.

Whether an LLC issues membership certificates is generally determined by the company’s management. While not legally required, a membership certificate is sometimes used with an Article 8 opt-out to pledge ownership to a lender in the case of sophisticated Mezzanine lending.

LLC Membership Certificate vs. Operating Agreement

An LLC membership certificate and an Operating Agreement work together when documenting LLC ownership. A membership certificate provides a tangible record of a member’s ownership interest, while an LLC Operating Agreement is the legal contract that states how the company is owned, managed, and operated.

The key difference is that a membership certificate reflects the ownership stated in the Operating Agreement. The Operating Agreement defines member rights and responsibilities, including ownership percentages, voting rights, profit distributions, and transfer rules.

Although LLC membership certificates are optional, an Operating Agreement is the legally required Agreement, whether oral, written, or implied that establishes the ownership terms. Many LLCs use both together—the Operating Agreement sets the rules, and the membership certificate provides formal evidence of a member’s interest. Be careful when using membership certificates because they can sometimes be interpreted to be an addendum to the operating agreement, which can mislead investors and the nature of their ownership interest.

NEXT: “Do I Need a Delaware Business License for My Delaware LLC?”