LLC Units: Everything You Need to Know
Regardless of how the LLC chooses to assign ownership interest, both ways grant the members the right to share in the business profits and vote regarding business matters.3 min read
LLC units refer to the amount of the company each member owns. The ownership interest in a limited liability company (LLC) is expressed one of two ways:
- By membership units, which are like stock shares of a corporation
- By percentage
Regardless of how the LLC chooses to assign ownership interest, both ways grant the members the right to share in the business profits and vote regarding business matters.
An LLC has the option to distribute ownership interest however the members wish. This is one feature that sets an LLC apart from a corporation. Corporations are required to distribute ownership interest based on the amount of property or money each shareholder contributes. Limited liability companies are not bound by the same rules.
For example, say John contributed $10,000 to an LLC and Richard contributed $1,000 but handles more of the managerial duties of the business. They could choose to split the LLC's membership interests 50-50 so each has an equal share.
Limited liability companies can also be organized with differing ownership interest classes. This provides more flexibility to allocate voting power and profit shares. An LLC might create a unique class for additional voting power. This would allow each unit to have additional votes or receive a certain portion of the profits before those who don't fall under the special voting class.
The sale of membership interests in an LLC must comply with state and federal laws around securities. However, if the LLC is dealing with a small group of investors, generally fewer than 35, and isn't advertising the sale of membership interest, it might be exempt from most of these regulations. When an LLC is raising a large amount of funds from more than 35 investors, it is best to consult with a business or tax attorney.
How Do We Issue LLC Membership Interests?
To issue LLC membership interests properly, members should complete several important tasks:
- First, outline and specify membership interests in the signed operating agreement. These interests can be outlined as percentages or units.
- Second, make sure to specify considerations for payment of membership interest in the LLC in the operating agreement. In most cases, the consideration is cash, but other options include the provision of services or transfer of assets. State laws can affect what options are legal.
- The third task is maintaining written evidence that each member paid the consideration specified in the operating agreement. If the consideration was made in cash, the LLC should keep a record of that amount when it was deposited into the business account. If the consideration was not cash, the LLC should keep written documentation that outlines the agreement between the business and the member. The agreement should outline what the member is obligated to provide or has provided for the specific consideration.
An LLC must maintain a book of records to hold all important paperwork and documents. Some of the most important documents include:
- The operating agreement
- The document of organization that was filed with the Secretary of State to form the LLC
Additional documents relating to LLC membership interests include:
- A balance sheet with a capital account for each member. This should include the member's initial capital contribution and any subsequent decreases or increases, based on distributions and allocations.
- Ledger outlining transfers of membership and certificates of membership, with evidence of current membership interests.
Avoiding “Alter Ego” Problems
Keep careful track of how membership interests in an LLC are issued and distributed. An issue that can arise when the distribution isn't handled properly is an alter-ego analysis. This can void the benefit of limited personal liability. When forming an LLC, it's critical to issue the company's membership interests in accordance with legal regulations.
Delaware LLC Ownership: Units
Forming an LLC in Delaware is very appealing to entrepreneurs across the globe. This state's laws are some of the easiest to comply with and maintain, offering more flexibility to LLC members. In fact, Delaware is one of the country's most business-friendly states. Some people refer to it as the incorporation capital because it's home to the Court of Chancery and has a strong structure for corporate laws.
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