Issuance of units: Overview, definition, and example
What is issuance of units?
Issuance of units refers to the process by which a business entity, such as a limited liability company (LLC) or partnership, creates and distributes ownership units to members or investors. These units represent a stake in the company, similar to shares in a corporation, and typically come with certain rights, such as voting power or profit-sharing.
For example, a startup structured as an LLC may issue units to new investors in exchange for capital, allowing them to become partial owners of the business.
Why is issuance of units important?
The issuance of units is essential for businesses that want to raise capital, distribute ownership, or bring in new partners. It provides a structured way to allocate equity while ensuring that ownership rights are properly recorded and legally enforceable.
Properly handling unit issuance helps businesses maintain compliance with governing documents, such as an operating agreement, and applicable laws. It also ensures transparency in ownership distribution, reducing disputes over equity stakes.
Understanding issuance of units through an example
Imagine an LLC with three founding members. The company decides to bring in an additional investor and issues 1,000 new units in exchange for a $500,000 investment. This transaction increases the total number of units, slightly reducing the ownership percentage of the original members while providing the company with much-needed capital.
In another example, a real estate investment partnership issues units to new partners who contribute funds to acquire property. Each partner receives units based on their financial contribution, giving them a proportional share of profits and decision-making power.
Example of an issuance of units clause
Here’s how an issuance of units clause might appear in an LLC operating agreement:
“The Company may issue additional Units to existing or new Members upon approval of the Majority Members. Any issuance of Units shall be subject to the terms and conditions set forth in this Agreement, and no issuance shall dilute the rights of existing Members unless expressly agreed upon.”
Conclusion
Issuance of units is a key mechanism for businesses to distribute ownership, raise capital, and bring in new investors. Clearly defining unit issuance procedures in a company’s governing documents helps ensure fairness, legal compliance, and transparency in ownership distribution. Businesses should carefully manage unit issuance to protect the interests of all members.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.