Multiple members generally share the collective ownership if it is spelled out in the articles of organization of the LLC. All the owners of an LLC are also the members of an LLC; however, not all the members are necessarily the LLC owners. It is because laws allow LLCs to have members who look after the LLC activities and work as its employees.
Before the members can pen down the operating agreement of the LLC, they have to decide on the ownership division of the LLC. It is generally agreed by the contribution of each member in an LLC. For example, four LLC members who invest $10,000 in an LLC apiece would each receive an ownership stake of 25%.
The profits are then equally divided as per the stake of each member in the ownership. It is simple mathematics and does not involve much hassle. In the case of one member investing more capital between the financial year, profits are then distributed as per the new investments.
It is also essential to file down the investments, profits, and losses in the operating agreement of the LLC. Some states may require you to file an operating agreement to the office of the secretary of the state. It is done to ensure compliance with the financial laws of the given state.
LLC OWNERSHIP TYPE
In a single-member LLC, the sole member is the complete owner of an LLC. Similarly, as discussed earlier, in a multi-member LLC, the ownership stake is divided as per the contribution of each member.
Almost all states don’t impose any restrictions on LLC ownership, except that the owner must be 18 or over. Similarly, owners of an LLC don’t have to be American citizens. All kinds of organizations can be members and owners of an LLC, including corporations, s corporations, trusts, and other LLCs. A holding company can also be found to own an LLC.
While most states do not ask for the owners to be identified, an LLC must remember its members-owners in certain states and under some instances. For example, suppose the LLC is a Professional LLC. In that case, the LLC owners need to be identified, and their professional licenses are checked, and the PLLC can only be found once those licenses are approved.
CHANGING OWNERSHIP OF AN LLC
After forming your LLC and defining its owners, an opportunity may arise where you have to change the LLC ownership structure. For example, a member-owner decides to leave the LLC, and you want to add a new member-owner to replace the outgoing partner.
How you change your LLC ownership depends on whether your LLC’s Articles of Organization has a provision that addresses adding or dropping LLC members. You may have no choice but to dissolve the original LLC and create a new one in some cases. Ownership of an LLC can be changed in multiple ways.
Two ways to change ownership are selling it ultimately or selling a partial interest in LLC and having another co-owner join you. Both types of ownership change are done in an almost similar way, and the process of it goes back to your operating agreement.
Usually, your operating agreement will include provisions on buying and selling of LLC – within LLC and outside of LLC. If your operating agreement has the process of selling defined, all you need to do is follow the procedures listed down in it, and you will be fine.
Suppose you do not have buy-sell provisions in your operating agreement and neither in articles of organization. In that case, you may need the help of your state business registration agency to understand the process. It would help if you also tried consulting an attorney on the best way to amend your operating agreement and your articles of organization. However, if neither document has a buy-sell provision listed down on them, and you cannot amend it, you may also need to dissolve your LLC.
CHANGING LLC OWNERSHIP PERCENTAGE
As the name implies, ownership percentages are defined as the stake of each owner in an LLC described in percentage. Ownership percentage depends typically primarily on how much each member has invested in the initial capital of the LLC compared to the amount of money that the LLC will take to get the business off and running. However, other factors, such as how much you work for an LLC and if you have invested further in the LLC during the course of business, also matter.
Your ownership percentage will determine the amount of profit of the LLC that you’re entitled to. Similarly, it will also determine the number of losses you’ll be responsible for, which is why it is vital to tread carefully in ownership stake. If the LLC takes a loss, and you’re a 60% owner, you’ll be hit with 60% of the total losses.
But the question is – how can you change the ownership percentage? And the answer is, just like in other changes in LLC, operating agreements.
This agreement will include all kinds of buy-sell provisions of the LLC that will specify how owners can transfer membership units among themselves. With an LLC, in the majority of the states, you will not be needed to file updated paperwork with your state, but, again, that will mainly depend on whether or not your original incorporation paperwork listed down the names and ownership percentages of all the partners.
If it does, you’ll be required to fill out an amendment with the new names of the partners and their relevant percentages. It is critical to read over your operating agreement carefully to ensure that all of its provisions still apply, and if they don’t, revise them properly. Finally, once you have divided ownership percentages, you can now issue new membership certificates to all owners to reflect the changes.
FREQUENTLY ASKED QUESTIONS
Here are some of the frequently asked questions answered under the context of all kind of ownership changes in an LLC:
- Can a member of an LLC have zero ownership?
Yes, it is down to the members of the LLC. They can employ managers in the LLC – who will technically be the LLC members – but can be made to work without ownership. LLC then pays such members as employees, and they will not have anything to lose or gain in the profits and losses of the LLC.
- Can an LLC own itself?
The LLC that you form is a separate legal entity from yourself, and it is created to own and protect the assets. It can also then own other LLCs, but an LLC cannot hold itself, and it is owned by its owners, who are also its members.