Having spent over ten years advising LLCs and diving deep into the subject, I’m here to offer a guide on how to share ownership in an LLC. Ownership percentages, also known as an ownership interest in an LLC, are the percentage of the company that belongs to a owner. LLC owners can divide their ownership by percentages. For example, an LLC owned by spouses might split ownership 50-50. Or in a three-member LLC, one member might own 60% of the LLC while two own 20% each.
An LLC can share its ownership interests however it wishes, regardless of how much capital or property the members contribute to the company. There are no limitations on the number of members an LLC can have. An LLC can be created in any state with only one member, known as a single-member LLC, or in any state with more than one member, known as a multi-member LLC. Our colleagues, attorneys, advisors specialized in LLCs have the experience and knowledge to guide you through the process of changing the percentage of an LLC.
Tax Considerations and Operating Agreement
LLCs can choose different tax classifications such as Sole Proprietorships for single-member LLCs or Partnership taxation for multi-member LLCs. The operating agreement outlines who owns the LLC and how much they own. We offer a free Operating Agreement template you can download here: Operating Agreement. Whether an LLC should have a single owner or multiple owners is up to you. However, if you’re unsure about adding a second member, take the time to think carefully about the hesitation.
There may be cases with more than two members contributing varying amounts of money and services. In such cases, it’s essential to determine who owns what percentage of the ownership. Unlike C-corporations or S-corporations, LLCs don’t specify the number of shares the company has but instead list each member’s percentage of ownership. Deciding how to split ownership of an LLC may differ if one owner contributes more money, another more expertise, or if they both contribute equally.
Changing Ownership Percentages
To change LLC ownership percentages, follow these steps:
- File new ownership percentages with your state by submitting forms from your Secretary of State or state filing office.
- Notify LLC members of the change in ownership.
- Address how LLC profits and losses will be divided – if formed as a corporation, divide ownership of profits and losses according to the ownership percentages.
Create an operating agreement indicating how much of the company each member owns. This agreement provides specifics regarding company ownership. LLCs maintain a formal structure for documenting ownership details in the operating agreement. Members’ interests are detailed within this agreement. Before drafting an agreement, it is advisable to consult with a professional, as the process can be nuanced.
Determining Ownership Percentage
LLC ownership percentage is usually determined by how much equity each owner has contributed. The ownership interest given to each owner can depend on the limited liability company’s needs and the rules of the state where the LLC has been formed.
You should never own an LLC without an operating agreement because without it, determining ownership percentage can be challenging. If an operating agreement is not in place, other forms of understanding, such as emails specifying ownership percentages, could be interpreted as an agreement.
As a result of your ownership percentage, you will receive a share of the business’s profits and be responsible for its losses. The capital and profits are usually shared by the founders, but investors who contributed to the business’s startup may also be entitled to a portion of the earnings.
Why Sell Membership Shares?
The value of the company is subject to any number of valuation methods employed by evaluators, and determining an individual’s share ownership percentage is a critical part of this process.
Three concepts that are crucial for calculating the percentage of company ownership include Authorized Shares, Issued Shares, and Outstanding Shares. The number of authorized shares is the maximum that the company can issue to shareholders without amending the articles of incorporation.
Establishing ownership percentages is a necessary first step in forming an LLC in New York or any other state. An LLC’s owners can divide their ownership by percentages, and changes to these percentages require proper documentation and adherence to state regulations.