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the transfer. This means that if Bruce, Erika, and Michael decide to operate as a corporation, each
risks waking up one day to find that he or she has a new “partner” if one of the three has sold his or
her shares. To protect themselves against this eventuality, most closely held corporations include
restrictions on stock transfer in their charters, in their bylaws, or in stockholder agreements. These
restrictions set forth some variation of a right of first refusal for either the corporation, the other
stockholders, or both whenever a transfer is proposed. In addition, corporate stock, as well as most
limited partnership interests and LLC membership interests, are securities under the federal and state
securities laws, and because the securities of these entities will not initially be registered under any of
these laws, their transfer is closely restricted by law.
Limited Partnerships
Just as with general partnerships, the partners of limited partnerships may transfer their partnership
interests. The rules regarding the transfer of the interests of the general partners are similar to those
governing general partnerships described earlier. Limited partners may usually transfer their interests
(subject to securities laws restrictions) without fear of dissolution, but transferees normally do not
become substituted limited partners without the consent of the general partners.
Limited Liability Companies
As previously mentioned, although a membership interest in an LLC may be freely transferable under
applicable state law, most LLCs require the affirmative vote of at least a majority of the members or
managers before a member‟s interest may be transferred. Furthermore, membership interests in an
LLC will usually qualify as securities under relevant securities laws and will therefore be subject to
the restrictions on transfer imposed by such laws.
Control
Simply put, control in the context of a business entity means the power to make decisions regarding all
aspects of its operations. But the implications of control extend to many levels. These include control
of the equity or value of the business, control over distribution of profits, control over day-to-day and
long-term policy making, and control over distribution of cash flow. Each of these is different from
the others, and control over each can be allocated differently among the owners and other principals of
the entity. This can be seen as either complexity or flexibility, depending on one‟s perspective.
Sole Proprietorships