If you are a member of a Manager-Managed Limited Liability Company (LLC) in Pennsylvania, you’ve chosen a business structure designed for streamlined operations. Instead of all owners voting on every decision, you elect or appoint one or more managers (who may or may not be owners) to handle the day-to-day affairs.

This structure provides efficiency, but it makes the rules governing the transfer of ownership or membership interests even more critical. When an owner leaves, the central concern isn’t just who gets the profits; it’s who has the power to appoint or remove managers.

For small businesses, ensuring the Operating Agreement locks in these transfer rules is key to protecting non-managing members from losing control and preventing operational paralysis. Our startup and business law attorneys provide guidance on how Pennsylvania courts interpret LLC membership rights to ensure your company’s control and continuity are protected.

The Dual Nature of an LLC Interest

In a multi-member Pennsylvania LLC, an owner’s “membership interest” is a bundle of two distinct and separable rights:

Economic Interest (Financial Rights)

The right to receive an allocation of the LLC’s profits, losses, and cash distributions.

Management Interest (Governance Rights)

The right to vote on fundamental matters, participate in decisions, and elect or remove the company’s managers.

In a manager-managed LLC, a member intentionally gives up direct control over operations. Therefore, the ability to protect their indirect control by electing the manager is paramount when a transfer occurs.

The Operating Agreement as the First Line of Defense

The single most important document governing the transfer of membership interests is the Operating Agreement. In Pennsylvania, the LLC Act allows you to structure your company as you see fit, provided the rules are clearly laid out in this agreement.

Risks When Transfer Rules Are Missing

If your Operating Agreement is silent on transfers, your LLC is vulnerable to:

  • Unwanted Assignees: An ex-member’s creditor or former spouse could receive an economic interest and force the company to account to an outsider for profits.\
  • Loss of Control: Without specific rules, a departing member might inadvertently sell their crucial voting rights, disrupting the balance of power among the remaining members.

A robust agreement for a manager-managed LLC must contain strong transfer restrictions to ensure the control structure remains stable.

Restricting Transfers to Prioritize Control

The primary goal of any transfer restriction is to prevent an outsider from acquiring the Management Interest without the express approval of the remaining partners.

Voluntary Transfers and the Right of First Refusal

If a member wants to sell their equity to a third party, your agreement should enforce a strict Right of First Refusal (ROFR) process as the first line of defense to keep ownership within the existing group.

Required Components of a Proper ROFR Process

  • Notice and Terms: The selling member must present the remaining members with the written terms of the third-party offer, including price and buyer identity.
  • Matching Option: The LLC or the remaining members have the right to purchase the interest on identical terms.
  • Waiver and Restriction: Only if the LLC and the members explicitly waive their right to purchase, or fail to respond within the notice period, may the sale proceed to the third party.

The Critical Restriction on Management Rights

This is the cornerstone of continuity in a manager-managed LLC. Pennsylvania law provides a crucial default protection. A member may transfer their economic interest, but they cannot transfer their management interest to an assignee without the consent of the remaining non-transferring members. The nature of your business and ownership structure will help determine whether that consent should be unanimous, a supermajority, a simple majority, or another defined threshold.

How Your Operating Agreement Should Handle This

Your Operating Agreement must explicitly reinforce and detail this statutory protection.

  • Assignee Status: If a third party purchases the interest after a ROFR waiver, they are treated only as an Assignee. They receive the right to profit distributions, but they do not receive voting rights, management authority, or the right to participate in the selection or removal of managers.
  • Voting Rights Retained: The management interest remains with the original member, even if they no longer receive profits, or it is retired or redistributed among the remaining members depending on the agreement’s terms. This prevents the third party from challenging current management.

Why This Matters in Manager-Managed LLCs

In a manager-managed LLC, the stability of the management team is essential. The Operating Agreement must focus on preserving the management structure agreed upon by the founders.

If a departing member’s voting rights are transferred to an outsider, that outsider could gain leverage to demand operational changes, vote on the election or removal of the manager, or attempt to force a dissolution of the company. For small businesses and LLCs, you went into business with specific individuals, not with whomever they decided to sell their interests.

How Strong Transfer Rules Protect Your Business

By implementing strict transfer restrictions, mandatory buyouts, and clear separation between economic and management interests, you ensure that:

Managers Remain Accountable

The appointed managers answer only to the original, vetted members.

Business Operations Stay Stable

Buy sell events become transitions, not crises, because the process and pricing are known in advance.

Control Stays With the Right People

The governance power of the LLC remains exclusively with those who built the business.

Your choice of a manager-managed structure was a sophisticated move toward efficiency. Ensure your Operating Agreement is equally sophisticated in protecting that structure from the inevitable transfer of ownership.

Speak to Spengler & Agans Now

If you want to ensure your Pennsylvania LLC Operating Agreement properly protects your ownership structure and management control, it is wise to speak with an experienced business attorney. Schedule a consultation online with Nathan Wenk at Spengler & Agans by using the Contact us page to get guidance tailored to your business needs.