North Dakota Security Agreement regarding Member Interests in Limited Liability Company

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Multi-State
Control #:
US-1033BG
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Description

A Limited Liability Company ("LLC") is a separate legal entity that can conduct business just like a corporation with many of the advantages of a partnership. It is taxed as a partnership. Its owners are called members and receive income from the LLC just as a partner would. There is no tax on the LLC entity itself. The members are not personally liable for the debts and obligations of the entity like partners would be. Basically, an LLC combines the tax advantages of a partnership with the limited liability feature of a corporation. Management of an LLC is vested in its members. An operating agreement is executed by the members and operates much the same way a partnership agreement operates. Profits and losses are shared according to the terms of the operating agreement. Most, if not all, major loans involve creating a lien on the property. A lien on real estate would take the form of a mortgage or a deed of trust. A lien on all other property would be covered by a security agreement. In this agreement, the borrower in a loan transaction would give a security interest in personal property in order to secure payment of his loan or credit obligation. Article 9 of the Uniform Commercial Code deals with secured transactions. A creditor who complies with the requirements of Article 9 can create a security interest that protects him against the debtor's default by allowing the creditor to recover by selling the goods covered by the security interest.
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  • Preview Security Agreement regarding Member Interests in Limited Liability Company
  • Preview Security Agreement regarding Member Interests in Limited Liability Company
  • Preview Security Agreement regarding Member Interests in Limited Liability Company
  • Preview Security Agreement regarding Member Interests in Limited Liability Company
  • Preview Security Agreement regarding Member Interests in Limited Liability Company
  • Preview Security Agreement regarding Member Interests in Limited Liability Company
  • Preview Security Agreement regarding Member Interests in Limited Liability Company
  • Preview Security Agreement regarding Member Interests in Limited Liability Company
  • Preview Security Agreement regarding Member Interests in Limited Liability Company

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FAQ

Security: An LLC, however, can elect to have its membership interests classified as securities under Article 8 of the UCC. Generally, the organizational documents must expressly state that the membership interests are to be treated as securities.

As a result, lenders desiring to secure their loans with an equity pledge (typically either in the borrower itself or its subsidiaries) are increasingly taking pledges of LLC membership interests as part of their collateral.

In most cases, an LLC interest is a general intangible. Once the lender has made that determination, issues of perfection and priority of the security interest can be addressed under the UCC Article 9 perfection rules.

General intangible: Most commonly, a membership interest in an LLC is considered a general intangible.

In California, shares of an LLC in which any member is not continuously actively involved in the management of the LLC would qualify as securities. The most common scenario where this would happen is if the LLC is manager-managed and at least one member does not participate in the day to day operations of the business.

All ownership interests in a manager-managed LLC are considered securities even if some members actually are involved in the daily management of the business.

Under this definition, a membership interest in an LLC is a security for California law purposes unless all of the members are actively engaged in management. Thus, interests in a manager-managed LLC where not all members are managers are securities under California law.

A membership interest represents an investor's (called a "member") ownership stake in an LLC. A person who holds a membership interest has a profit and voting interest in the LLC (although these may be amended by contract). Ownership in an LLC can be expressed by percentage ownership interest or membership units.

All ownership interests in a manager-managed LLC are considered securities even if some members actually are involved in the daily management of the business.

All corporations and limited liability companies, except as otherwise provided in this chapter, are prohibited from owning or leasing land used for farming or ranching and from engaging in the business of farming or ranching.

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North Dakota Security Agreement regarding Member Interests in Limited Liability Company