LLC Ownership: Everything You Need to Know
An LLC ownership is the entitlement of an individual or group of people to the shares of a limited liability company, which are expressed by percentages or member units.3 min read updated on February 01, 2023
There are five steps to LLC ownership:
- Choose a state.
- Name your company.
- Get a registered agent.
- File your organizing documents.
- Create an operating agreement.
Forming an LLC
Different states have slightly different procedures for starting an LLC, but they're all basically the same. For instance, if you choose Texas, you'll have to file a certificate of formation with the secretary of state, and if you choose Arizona, you'll have to file articles of organization with the Corporate Commission.
The documents you file define the structure of the LLC. Such documents clearly state how the LLC will be run. They state whether the LLC will be managed by every member, which is called “member-managed,” or if the members will appoint someone or a group of people to manage it, which is called “manager-managed.”
All owners of an LLC are authorized to take part in the daily operations of its business in a member-managed LLC. On the other hand, a manager-managed LLC reserves such participation for appointed managers.
An advantage of running an LLC is the flexibility it offers its owner(s) to choose their preferred income tax filing status for the LLC. LLCs are referred to as “disregarded entities” by the IRS (Internal Revenue Service) because the IRS does not have any particular tax classification for a limited liability company.
Therefore, the IRS sees single-member LLCs as sole proprietorships while multi-member LLCs are treated as partnerships. LLCs, in spite of the above-mentioned facts, can make a request to the IRS to change their status to that of a corporation for reasons of income tax by filing Form 8832 Entity Classification Election. Before creating an LLC, the owner(s) should decide what tax classification would be best for them.
LLC Operating Agreements
Even though it's not compulsory to run an LLC with a documented operating agreement, it would be unwise not to have one to protect the interest of each LLC member.
Some of the benefits of running an LLC with an operating agreement are:
- It prevents managerial and financial conflicts.
- It protects every LLC member's limited liability status.
- It ensures that members run their business on their terms and keeps them in control through their own rules, rather than leaving them at the mercy of state laws.
- It earns the respect of the law court for the limited liabilities of the LLC members.
Therefore, it's in the interest of LLC owners to pay attention to the importance of an operating agreement in lending their LLC some legal authority.
Operating agreements typically include the following:
- Roles and rights.
- Powers to vote.
- Sharing of profits and losses.
- LLC management.
- Rules for buyouts.
- Rules for member loss or member addition.
The above-listed items require careful consideration and binding decisions, which should be clearly stated in the operating agreement. There are various operating agreement templates, which you can get easily. Make sure the operating agreement you create with them is appropriate for your state.
There are two ways of experiencing an LLC ownership. They can buy membership units that seem like stock shares in corporations or buy percentages. LLCs can distribute their interests as they choose, without considering how much contribution a member makes, unlike corporations.
For instance, if Sam and Rick are LLC partners and Sam, a silent partner, contributes $10,000 to the company while Rick contributes nothing, but actively runs the company, they can decide to share the proceeds of the LLC equally. Making significant amounts of money through an LLC is possible but a bit complicated. If you're looking to raise substantial amounts of money from a huge number of investors in an LLC, you'll need the help of a lawyer.
What a member contributes to their LLC is called a capital contribution and is recognized as their contribution to the ownership. The capital contribution of an LLC member entitles them to share in the profits and losses of the LLC.
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