Key Takeaways

  • LLC ownership is represented by membership interests, which can be divided by percentages or units.
  • Owners, known as members, can be individuals or entities, including corporations or other LLCs.
  • An LLC can be member-managed or manager-managed, defining who runs daily operations.
  • Operating agreements determine voting rights, profit distribution, and buyout procedures.
  • LLC ownership can be transferred or sold, though often subject to member approval and restrictions.
  • Ownership records are usually private, but some states make member names public in formation filings.

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.

There are five steps to LLC ownership:

  1. Choose a state.
  2. Name your company.
  3. Get a registered agent.
  4. File your organizing documents.
  5. 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.

Understanding LLC Members and Managers

LLC ownership is held by members, who are similar to shareholders in a corporation but have more flexibility in management and profit sharing. Members can include individuals, corporations, partnerships, or even other LLCs. Most states require at least one member, though there is no maximum limit.

An LLC can be managed by its members or by appointed managers, depending on the structure chosen in the formation documents.

  • Member-managed LLCs: All members participate in business decisions and daily operations.
  • Manager-managed LLCs: Members delegate management authority to one or more managers, who may or may not be members themselves.

This management distinction affects voting power, authority, and even how profits are distributed. Choosing the right structure depends on the size of the LLC, the number of members, and how actively members wish to participate.

Tax Classification

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.

Single-Member vs. Multi-Member Ownership Structures

There are two primary types of LLC ownership structures:

  1. Single-member LLCs (SMLLCs): Owned by one person or entity. The IRS treats them as disregarded entities for tax purposes, meaning profits and losses are reported on the owner’s personal return.
  2. Multi-member LLCs: Owned by two or more members. The IRS classifies these as partnerships by default unless the members elect corporate taxation.

Multi-member LLCs require greater formality in profit distribution, voting procedures, and recordkeeping. Ownership percentages or units must be clearly outlined to prevent future disputes. Regardless of the number of members, an operating agreement is strongly recommended to define each owner’s rights and responsibilities.

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.

Voting Rights and Decision-Making

In LLC ownership, voting rights usually correspond to ownership percentage, but members may agree to distribute voting power differently in the operating agreement. For instance, one member may contribute more capital but agree to share equal voting power with another member who provides operational expertise.

Common voting issues include:

  • Admitting new members
  • Approving mergers or acquisitions
  • Amending the operating agreement
  • Dissolving the LLC

Unanimous consent is often required for major structural changes, while ordinary business matters may be decided by a simple majority. These procedures should be documented in the operating agreement to maintain clarity and avoid legal conflicts.

Ownership Percentages

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.

Transferring and Selling LLC Ownership Interests

Transferring LLC ownership interests is possible but often restricted to protect the business’s integrity. The process depends on state law and the LLC’s operating agreement. Generally, a member cannot transfer their ownership without the consent of the remaining members.

There are two main types of transfers:

  • Voluntary transfers, such as selling an ownership interest to another person or entity.
  • Involuntary transfers, which can occur through court orders, bankruptcy, or death.

Some operating agreements grant right of first refusal, allowing existing members the first opportunity to buy the departing member’s share. If a member dies, the agreement may specify whether the ownership passes to heirs or triggers a buyout.

LLC Contributions

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.

Privacy and Disclosure of LLC Ownership

LLC ownership information is often private, but disclosure rules vary by state. Some states, such as Delaware, Wyoming, and New Mexico, allow members to remain anonymous in public filings, listing only the registered agent’s details. Others, like California and Florida, require identifying at least one manager or member in formation documents.

Despite public privacy, LLCs must still maintain internal ownership records and may need to disclose them for banking, tax, or regulatory compliance. Additionally, federal law now requires certain LLCs to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) under the Corporate Transparency Act.

This regulation increases transparency to prevent money laundering and fraud, but ownership data submitted to FinCEN remains confidential and is not publicly accessible.

Frequently Asked Questions

1. Who can own an LLC? Any individual, corporation, partnership, or another LLC can own an LLC. There are no citizenship or residency requirements for ownership in most states.

2. Can LLC ownership be split unevenly? Yes. Members can agree to any ownership distribution they prefer, regardless of initial capital contribution.

3. How is LLC ownership transferred? Ownership transfers typically require the consent of other members and must follow procedures outlined in the operating agreement or state law.

4. Are LLC owners’ names public? In some states, yes. However, states like Delaware, Wyoming, and New Mexico allow LLC owners to remain private.

5. Do LLC owners pay self-employment taxes? In most cases, yes. Profits passed through to members of a member-managed LLC are subject to self-employment tax unless the LLC elects corporate taxation.

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