LLC Ownership Percentage: Everything You Need to Know
LLC ownership percentage is usually determined by how much equity each owner has contributed.3 min read
2. Organizing an LLC
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 need of the limited liability company and the rules of the state where the LLC has been formed.
Background of LLC Ownership Percentage
A Limited liability company (LLC) is a form of business entity that offers the limited liability of traditional corporations and the simplified management structure of a partnership. Although there are many differences between corporations and LLCs, one of the biggest is how ownership is determined. Corporations, for instance, issue stocks to their owners. LLCs indicate ownership in a different manner.
LLC owners, commonly referred to as members are given a percentage of interest in the company. This percentage will be typically be calculated based on what each owner contributed to the LLC when it was formed. The LLC ownership percentage of every member should be recorded in the company books. The record of a member's ownership percentage is called an Accumulated Adjustments Account.
When you form an LLC, you will need to comply with the laws in the state where your company will operate. States are allowed to have their own rules for LLC formation, but there are generally standard rules that will apply in every state. You should reference state laws when you wish to form your LLC, which can include guidelines for:
- Registering your LLC.
- Capitalizing your LLC.
- Managing your LLC.
In general, states do not have a specific method for specifying ownership percentage, and in some jurisdictions, you may not even need to report LLC ownership percentage outside of taxes.
There are two basic ways that an LLC can express company ownership. First, the LLC can use an ownership percentage. Second, LLCs can express ownership using membership units, which function similarly to company shares. Whichever option is chosen, holding an ownership percentage in an LLC grants voting rights and a right to company profits.
LLCs differ from corporations in that they are allowed to distribute company ownership however they see fit. This means ownership percentages can be distributed without regard to the member's initial contribution.
For example, if your initial contribution to the LLC is $20,000 and you are a silent partner, and another member doesn't make a contribution but is responsible for managing the company, you could both have a 50 percent ownership interest even though you were the only one that made a monetary contribution.
It is also possible for ownership interests in an LLC to have different classes. The reason for different ownership classes would be the ability to allocate special voting power and profits. For instance, you could create voting units that could grant extra power, meaning one of these special units would count for 10 votes, whereas a normal unit might only represent one vote. Securities laws at both the state and federal level govern how membership interests can be sold.
If you are selling to an investor group with less than 35 people and you haven't actively advertised the sale, then most regulations will not apply. Consulting an attorney is a good idea if you are trying to raise a large amount of money from a significant number of investors. Owners of an LLC are allowed to include whatever provisions they want in the LLC's Articles of Organization, so long as these provisions are legal. So, if the owners choose, they can use their Articles of Organization to describe LLC ownership percentages and to list the company's members.
Organizing an LLC
Several steps are required for organizing an LLC. Fortunately, these steps aren't as difficult as they might seem at first glance. First and foremost, you will need to decide the state where you will organize your LLC.
Choosing the right state for the organization can come down to several issues:
- Where your business is physically located.
- The filing fees you will need to pay when registering your LLC.
- The need to pay annual fees or to comply with annual reporting requirements.
- Privacy rights and other privileges granted by the state.
If you're running a small business, the best idea is forming your LLC in the same state where your business is conducted. On the other hand, if you plan to transact business across many states, you will need to register your LLC in each state where operations will take place.
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