How Do You Value an LLC Membership Interest?

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Valuing Membership Interest in an LLC

  • To value membership interest, establish average monthly income over 24-36 months. Subtract company debts and add cash reserves.
  • In an LLC, members invest and get a company share in return. Members with ownership interest receive profits and losses.

Transferring Membership Interests

  • Membership interests can be sold or transferred. The sale must comply with federal and state securities laws.
  • A Membership Interest Assignment is used when a member transfers their entire membership interest.

Operating an LLC and Valuation Methods

  • Members govern the business, including adding members. To sell an ownership percentage, obtain consent then update the operating agreement.
  • A membership interest certificate designates the ownership a member has in an LLC. They are beneficial when there are multiple owners.

LLC Membership Interest Valuation

  • Two popular methods are used to establish an LLC’s value, and a member’s interest is then valued by the conditions and percentage of his membership.
  • Assume an LLC is valued at $500,000, and one member has a 20 percent ownership interest. Using a simple valuation formula based on total value over ownership percentage, this particular member’s share is worth 20 percent of the $500,000, or $100,000.

LLC Basics and Business Valuation

  • Think of an LLC as a hybrid creature, like a platypus in the world of business entities.
  • Trusts are popular asset transfer vehicles that allow you to avoid probate and keep assets out of the hands of creditors.

Valuation Methods and Approaches for an LLC

  • The most common business valuation methods are public company comparable, precedent transaction analysis, discounted cash flow method, capitalization of earnings, and more.
  • Business valuation determines the economic value of a business or business unit.

Net Asset Value Method

  • The net asset value method determines the value of a business by taking the difference between the company’s total assets and total liabilities.

Income Method and DCF Valuation

  • The DCF method of valuation is based on the principle that the value of a company is the present value of all its future cash flows.
  • The second business valuation approach is the income method.

Business Valuation and Market Method

  • With the income method, your LLC is valued based on the average monthly income for the last 24 to 36 months. Add the amount of cash reserves and subtract any debts. The result should be multiplied by a factor established by the members to arrive at the company’s value.
  • The market value method examines the valuations of similar companies that have recently sold.

Protecting LLC Interests and Intellectual Property

  • Forming an LLC can help protect your intellectual property rights.
  • What is intellectual property? Intellectual property refers to intangible assets that are created through intellectual or creative efforts.

LLC Ownership and Trusts

  • Transferring an LLC to a trust requires a bit of paperwork, and in multimember LLCs, may also require the consent of other members.

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