Key Takeaways

  • LLC ownership is flexible — members can include individuals, corporations, trusts, or other entities, with varying ownership percentages and rights.
  • An LLC can be single-member or multi-member, with ownership defined in the operating agreement.
  • Ownership stakes determine profit distribution, voting power, and decision-making authority.
  • Transfer of ownership interests may require member approval and should follow state law and the LLC’s operating agreement.
  • Ownership classes can grant different rights, including preferred distributions or special voting powers.

Owner of LLC

An owner of LLC is also referred to as a member. Mostly anyone can be an owner in an LLC, so long as that member is at least 18 years of age. In fact, LLC members need not be U.S. citizens. Most businesses can also be owners in an LLC, including corporations (C and S corp), other LLCs, partnerships, trusts, pension plans, and nonprofits. Some states require the LLC owners’ names be disclosed on the formation documents, whereas other states provide complete anonymity, like Delaware. If the LLC operates as a Professional LLC (PLLC), then the members’ names must be disclosed due to the requirement of all members to have a professional license in the industry in which the business operates.

LLC Ownership: An Overview

An LLC, also referred to as a limited liability company, is a popular type of business structure due to the many benefits it offers, including pass-through taxation, limited liability protection, management structure flexibility, cheaper costs, and fewer formalities. The LLC owner can call him or herself by any title, including president, CEO, etc. However, this is not required. Some examples of LLC ownership structure include:

  • Family members owning a family business
  • Two or more unrelated parties establishing a business venture
  • A multi-member LLC that is managed by one of the members
  • A multi-member LLC that is managed by a third party

An LLC can consist of one owner (single-member LLC) or several owners (multi-member LLCs). The LLC itself is formed by filing the Articles of Organization in the state in which it wants to form. Also required in the formation documents are the business name, address, member information, industry type, registered agent information, and type of management structure.

The LLC can be managed in one of two ways – as a manager-managed LLC or member-managed LLC. Generally, single-member LLCs operate as a member-managed LLC choosing to operate the business on his or her behalf. However, multi-member LLCs must determine if the members will oversee the daily operations of the business or if they will hire a third party to manage it. If they do hire a manager, the members won’t have oversight of the business operations, but will still have voting power and control over major business decisions.

Understanding LLC Membership and Ownership Rights

LLC ownership, often called a “membership interest,” represents a member’s share in the company, including their rights to profits, voting power, and control over major business decisions. Members typically hold ownership as a percentage, determined by their capital contributions or as otherwise defined in the operating agreement.

Ownership rights generally include:

  • Profit and Loss Allocation: Members are entitled to a share of profits and losses based on their ownership percentage or as agreed in the operating agreement.
  • Voting Rights: Voting power often aligns with ownership percentage, but the agreement can grant unequal voting power to certain members.
  • Management Participation: Members may manage the business directly in a member-managed LLC or retain oversight while delegating management in a manager-managed structure.
  • Access to Information: Members have the right to inspect company records, financial statements, and decisions affecting their investment.

Operating agreements play a critical role in defining these rights. For example, they can allow disproportionate profit sharing, limit voting rights for passive investors, or create special rights for founding members.

What is a Major Business Decision?

If you operate a manager-managed LLC, your Operating Agreement should indicate that the owners still have control over major business decisions. Examples of some major business decisions include the following:

  • Sale of property
  • Financing
  • Budgetary decisions
  • Lease contracts
  • Capital expenditures
  • New business ventures
  • Decisions regarding dissolution or bankruptcy
  • Admission of new members
  • Sale of membership interest

The requirements for such major decisions should be laid out in detail in the Operating Agreement. Therefore, if you want all members to agree upon such decisions, then you should indicate that 100% of the members must agree. However, you could also provide that 50% of the members must agree on the major decisions. Certain major decisions might require greater approval percentages than other decisions. For example, regarding the sale of membership interest, the members might require that all other members approve. The members might also indicate in the Operating Agreement that any member wanting to sell his or her interest in the business must sell to another existing member. However, lease contracts might only require 50% approval.

One problem with such major decisions is that the decision cannot be agreed upon by the members, which could lead to a dispute amongst owners. But if a potential legal dispute arises, the Operating Agreement will be legally binding in court. For this reason, it is important for the members to abide by what was previously identified and agreed upon in the Operating Agreement.

Transfer and Sale of Ownership Interests

Transferring LLC ownership is more complex than selling stock in a corporation. Most states require member approval before any ownership interest can be sold or transferred to an outside party. The operating agreement should clearly outline procedures for ownership changes, including:

  • Right of First Refusal: Existing members may have the right to purchase the selling member’s interest before outsiders.
  • Buy-Sell Provisions: These clauses define how ownership interests are valued and transferred upon events like death, divorce, or bankruptcy.
  • Restrictions on Transfers: Transfers may require unanimous consent or a supermajority vote to protect the company from unwanted new members.

Without these provisions, ownership disputes and legal complications can arise. Planning ahead ensures continuity and stability in the company’s structure.

Ownership Class

An LLC can have more than one type of membership class. Different classes could have different ownership rights. For example, one class of members might have preferred rights to distributions over another class. Furthermore, another class might have greater decision-making authority over another class. Such ownership class should be identified in the Operating Agreement, which will specify the classes of ownership and membership percentages of all members.

Types of Ownership Structures in an LLC

LLCs can use different ownership structures to meet their strategic and operational goals. Some common structures include:

  • Single-Member LLC: Owned by one person or entity. Offers simplicity but less flexibility for raising capital.
  • Multi-Member LLC: Owned by two or more members, often with varying ownership percentages and voting rights.
  • Tiered LLCs: One LLC owns another, allowing for liability protection and tax planning benefits.
  • Class-Based Structures: LLCs can create multiple membership classes (e.g., Class A with voting rights, Class B with preferred distributions) to attract investors or allocate control strategically.

These structures provide flexibility in managing ownership dynamics. For example, investors can be granted preferred returns without voting rights, while founders retain decision-making control. Carefully drafting the operating agreement ensures these arrangements are legally enforceable.

Frequently Asked Questions

  1. Can a non-U.S. resident have LLC ownership?
    Yes. Foreign individuals and entities can own an LLC in the U.S., although there may be additional tax reporting requirements.
  2. How is profit distributed among LLC owners?
    Profits are typically distributed based on ownership percentage, but the operating agreement can allocate them differently if agreed upon by members.
  3. Can LLC ownership be transferred freely?
    Usually not. Transfers often require member approval, and many LLCs include restrictions or buy-sell clauses in the operating agreement.
  4. What happens if an LLC member dies or leaves?
    Ownership interests typically pass according to the operating agreement. This may involve a buyout by remaining members or transfer to heirs.
  5. Are ownership classes necessary in an LLC?
    Not always. They are optional but useful for structuring control, profit distribution, or investor involvement differently among members.

If you need help learning about the ownership structure of an LLC, or need help forming your LLC, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.