Membership Units LLC: Everything You Need to Know
Membership units LLC is used to determine how much ownership each member is able to claim in the company.3 min read
Membership units LLC is used to determine how much ownership each member is able to claim in the company.
What Are Units in an LLC?
In an LLC, units are used to break down the percentage of ownership each member is able to claim in the company. Typically, one unit will equal one percent of ownership, or equity, in the company. In terms of ownership, 100 percent of the company must be owned at all times because LLCs don't have treasury units or stock that can be deemed as owned pro-rata by other equity holders. In simple terms, this means that the sum of units each member can claim ownership to must equal 100 percent.
Membership units will normally be included in the company's Operating Agreement. In a corporation business structure, there are specific rules that outline the ownership of stock. An LLC, however, does not include any such regulations so it is entirely up to the company members to determine how ownership is distributed. This is normally outlined in the company's Operating Agreement.
For this reason, most lawyers will include the concept of "units" or "membership units" when drafting the Operating Agreement in order to establish how much ownership each member is entitled to. For example, in an LLC with two members, member A may have 60 units while member B can make a claim of 40 units of ownership. Or ownership could be split down the middle, with 50 member units allocated to each member. As long as the sum of units each member can claim equals 100 percent ownership in the company, member units may be distributed however the members see fit.
In a certain sense, member units may be compared to stock shares, as they are a method of determining how much equity each member is entitled to. This is where the comparison should end, however, as member units and stock have very different meanings under the surface. Whether or not member units offer similar rights as stock shares depends largely on what is included in the company's Operating Agreement. Unless there is specific information pertaining to this concept in the Operating Agreement, it should be assumed that units do not offer the same rights as stock.
How to Issue LLC Membership Interests
It is important to note, if you choose to form your LLC without the assistance of a lawyer, the chances that membership interests won't be properly issued is high. You need to have a written Operating Agreement in place that contains signatures from all of the LLC's members and outlines the number of member units that should be allocated to every member involved in the company.
Additionally, your Operating Agreement should specify the financial consideration to be paid out to each member for membership interests. This consideration is normally paid in cash but could take other forms, such as a transfer of assets or provision of certain services. The choices available for these considerations will depend on your specific Operating Agreement and any state laws that may apply.
There needs to be some sort of evidence that a member has actually paid the required consideration to secure their claim to their share of member units. For example, if the member paid their considerations in cash, there needs to be a record showing that the member in question has deposited the required dollar amount into the company's bank account. For non-cash considerations, it's a good idea to have a written agreement between the member and the company on file, which specifically outlines the transaction and any obligations associated with it.
Your company should maintain a record book that contains all of the LLC's important documents. This should contain, at the very least:
- Any organizational documents filed with your local Secretary of State
- Your company's Operating Agreement
- Records of considerations that have been paid to claim member units
It is extremely important to handle the issuance of membership units and interests correctly when you're forming a new limited liability company. As mentioned earlier, it is extremely difficult to make sure membership interests are handled correctly without a lawyer's assistance. It is highly recommended that you involve an attorney when you draft your company's Operating Agreement to make sure this issue is handled correctly.
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