How to Split Ownership in an LLC
- Consult LLC Operating Agreement
- Check State Laws
- Proceed to Split Profits and Losses
Divide LLC ownership by adding member cash investments. Receive ownership share equal to investment. With $25,000 each, get 25% stake.
To change percentage, transfer membership rights in operating agreement when established LLC.
LLC income passes through to owners, who report on personal returns. LLC itself does not pay taxes.
Regardless of structure, can split profits however you choose. But if no distribution plan in agreement, default is profits split by ownership share. With 80% ownership, get 80% profits.
Allocation agreement in operating agreement followed for profit allocation, not default state rules. But allocation unrelated to actual distribution.
Ways to Divide Ownership
Percentage ownership: 50/50 for spouses or 60/20/20 for three members.
To change IRS Responsible Party, file Form 8822-B. Update as soon as possible.
Without operating agreement, legally beholden to default percentage profit split.
Exciting bit is profit distribution. Fully distributed means $70k to John for 70% and $30k to Pete for 30% of $100k profits. Typically paid lump sum after fiscal year.
LLC formal partnership requiring articles filed with state. More flexibility and protection than corporation. May elect no federal taxes paid directly.
You can split profits equally or base salaries plus split remaining profits.
To avoid general partner liability, create entity like LLC as partner. Home and bank not at risk for LLC obligations.
IRS treats one-member LLCs as sole proprietorships. No separate tax return. Report all profits/losses on Schedule C.
Avoid corporate double taxation by retaining earnings.
Multi-member LLC has two or more members. Treated as corporation, partnership, or part of owner’s taxes for federal purposes.
Additional Information
I’m offering a guide on properly and legally sharing LLC ownership from over ten years advising LLCs.