A Limited Liability Company (LLC) offers small business owners in Pennsylvania a powerful combination of liability protection and operational flexibility. However, the legal landscape surrounding LLC ownership can be complex, particularly when distinguishing between a full member and an owner of an economic interest. If you have invested in a Pennsylvania LLC but do not participate in day-to-day decisions, understanding your rights or lack thereof is critical to protecting your investment.

Issues involving ownership structure, transferred interests, and member rights are commonly addressed through strategic business transactions that require careful planning under Pennsylvania law. At Spengler & Agans, we understand the critical distinction between these ownership types under the Pennsylvania Uniform Limited Liability Company Act of 2016 (the Act). It outlines the specific rights afforded to holders of only an economic interest.

Membership Interest vs. Economic Interest

In a Pennsylvania LLC, a member’s ownership stake is generally divided into two components.

Governance Rights or Membership Interest

These are the rights to participate in the company’s non-economic matters. They include the right to vote on significant business decisions, the power to manage or elect managers, and the right to access company records and information. These rights are fundamental to being a Member of the LLC.

Economic Rights or Transferable Interest

These are the rights to the company’s financial benefits. Specifically, the Act defines this as the right to receive distributions from the LLC, whether or not the person remains a member.

The Act makes it clear that these two bundles of rights are severable. When an LLC member transfers their interest to a non-member without obtaining the unanimous consent of the other members, or as otherwise provided in the Operating Agreement, they can only transfer their economic interest.

The person who receives this interest is often referred to as an Economic Interest Owner, a Transferee, or an Assignee. They have a financial stake, but they are not members of the LLC.

The Rights of an Economic Interest Owner

The most important right of an economic interest owner in a Pennsylvania LLC is the right to receive distributions.

Interim and Liquidating Distributions

An economic interest owner is entitled to receive the share of the LLC’s money or property that the transferring member would have otherwise received. This right includes interim distributions, which are payments from ongoing profits, and liquidating distributions, which represent the owner’s share of the remaining assets upon dissolution and winding up. For more information on liquidating and dissolving your Pennsylvania LLC, see our related blog post.

In practical terms, the financial return is directly tied to the percentage of the economic interest owned. If the operating agreement allocates ten percent of distributions to the transferring member, the economic interest owner is entitled to that same ten percent.

For additional information on LLC distributions, see our related blog post.

Charging Orders and Creditor Rights

While the rights of an economic interest owner are largely passive, the Act provides a mechanism through which a creditor of an individual member may reach that member’s economic interest. This mechanism is known as a charging order.

The Power of the Charging Order

Under the Act, a charging order is the exclusive remedy for a judgment creditor seeking to satisfy a debt against a member’s interest. The charging order creates a lien against the member’s transferable interest and redirects any future distributions to the creditor.

If an economic interest is subjected to a charging order and later foreclosed upon, the purchaser at the foreclosure sale only receives the limited rights of a transferee. That purchaser does not become a member and does not gain management authority.

Exception for Single Member LLCs

The Act includes an important exception for single-member LLCs. In this situation, a creditor foreclosing on the sole member’s interest may be able to reach the entire interest, including governance and management rights, because there are no other members whose interests need protection.

What Economic Interest Owners Cannot Do

An economic interest owner has no right to participate in the management or conduct of the LLC’s activities and affairs. This means they cannot vote on company matters, elect or remove managers, sign contracts on behalf of the LLC, or influence business strategy or daily operations.

This structure protects the existing members’ right to choose their business partners and prevents unapproved individuals from influencing company decisions.

No Right to Access Company Information

The right to inspect and copy company records is a core right of full members. The Act does not extend this right to owners of economic interests.

As transferees, economic interest owners generally have no right to demand access to financial records or operational information. This can be one of the most frustrating aspects of holding an economic interest, since the owner must rely entirely on the members to operate the business responsibly.

No Authority to Compel Distributions

Although an economic interest owner has the right to receive distributions when made, they typically cannot compel the LLC to make a distribution.

Decisions regarding whether distributions occur, when they occur, and how much is distributed rest with the members or managers, subject to the operating agreement. Unless there is evidence of a breach of contract or a violation of fiduciary duties, economic interest owners cannot compel payment.

The Importance of the Operating Agreement

While the Act provides default rules, a Pennsylvania LLC is fundamentally governed by its operating agreement. The Operating Agreement is the most important document defining the rights of economic interest owners.

The Operating Agreement may restrict transfers of economic interests, modify or expand certain rights, and define how distributions are calculated and paid. These provisions directly affect the value and enforceability of a financial interest.

Anyone considering acquiring or transferring an economic interest should carefully review the Operating Agreement. Its terms are enforceable under Pennsylvania law and often override statutory defaults.

Protecting Your Economic Stake

Economic interest owners rely on decisions made by others, without direct control or access to information. To protect an investment, several strategies should be considered.

Due diligence is critical before acquiring an economic interest and should include a review of the Operating Agreement, financial records, and business plans. Contractual protections may be negotiated through a separate agreement with the transferring member, including representations, warranties, or information-sharing obligations. Exit strategies should also be addressed early, such as buy-out rights, rights of first refusal, or other mechanisms that allow the economic interest to be sold under defined conditions.

Conclusion

The distinction between a full member and an economic interest owner is a foundational concept in Pennsylvania LLC law. Full members enjoy control and information rights, while economic interest owners are limited to financial returns. This structure preserves the integrity of the original ownership group while allowing for passive investment.

Understanding where your rights begin and end is essential when investing in or transferring interests in a Pennsylvania LLC.

Speak to Spengler & Agans Now

If you are considering acquiring an economic interest in a Pennsylvania LLC, transferring one, or dealing with disputes involving LLC ownership rights, professional legal guidance is essential. Nathan Wenk at Spengler & Agans advises business owners and investors on LLC structures, operating agreements, and ownership disputes under Pennsylvania law.

Contact us online to schedule a consultation for guidance tailored to your business needs.