What Are Owners of a Limited Liability Company?
The owners of a limited liability company, also called an LLC, are the members who formed the business and keep it running.3 min read
The owners of a limited liability company, also called an LLC, are the members who formed the business and keep it running.
What Is an LLC?
A limited liability company is a relatively new business structure in the United States. There are a few requirements that are the same for LLCs in every state:
- Articles of organization must be filed.
- This business must have at least one owner.
- The name must be original and unique.
- The company must obtain a registered agent.
Who Are the Members of an LLC?
Corporations have shareholders, partnerships have partners, sole proprietorships have, well, sole proprietors, and LLCs have members. These are all essentially the owners of these different business entity types.
The roles of members in an LLC are a bit more flexible that the roles of owners in other business structures. Member duties and titles will depend a lot on the size and organization of the LLC. LLCs can have members that act as managers, partners, and passive investors.
Owners of an LLC have a few different names to choose from. Other structures required the head of the company to adopt the title of CEO or President, but LLCs aren't bound by such rules. This is appealing to business owners who want their company to get away from the corporate world.
If an LLC's members take an active role in the daily operations of the business, they are managing members. An LLC can define itself as either member-managed or manager-managed. Basically, the business will be run by all of its members, or those members will hire a manager or choose one of the members to fill the role. Managers make important business decisions that keep the company running smoothly on a regular basis.
The shares that a managing member takes home can be treated like a salary and are therefore subjected to self-employment taxes, like Social Security and Medicare.
If a manager isn't chosen or hired, the IRS (Internal Revenue Service) assumes the LLC is member-managed and that all of the members are taking on management roles.
If the LLC chooses to become manager-managed, whether by hiring out or choosing from within, all non-managing members become "passive members." These members are like the limited partners in a partnership. They report their profit distributions as passive shares on their taxes, which are not subject to employment taxes.
Basically, the only involvement a passive member has in the business is financial. They can only be held liable for company debts or legal trouble up to the amount of their capital contribution, or initial investment. According to the Uniform Limited Liability Act, formed in 1996, the passive members of an LLC do not have rights or authority over the management or company operations. However, if the LLC wants to grant such rights to their passive members, they may say so in their operating agreement.
An LLC can decide how it wants to handle ownership percentages. Typically, this is done using ownership percentages or membership units. These are like the stock shares of a corporation.
LLC owners have the right to vote on company matters and share in its profits. Corporations require specific share distributions based on the initial investment amounts of shareholders. Ownership percentages are a bit more flexible with LLCs. A member with managerial duties may be granted a larger ownership percentage than another who gave a large contribution amount but has no managerial duties.
Different levels of interest are also an option for an LLC's structure. These are also called interest classes and can denote the type of involvement an investor wants. Some classes may offer more voting power than others and some may be be simple, uninvolved classes that allow for passive members.
How Many Owners Can an LLC Have?
LLCs are a mix of two older entity types: corporations and partnerships. They offer the liability protection that comes with corporations and the ownership flexibility that come with partnerships. The laws surrounding LLC structure and organization differ from state to state, but most require LLCs to have at least one member, some require two.
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