The limited liability company (LLC) is a popular business structure for new businesses, but what does it really mean to own an LLC? These entities provide unique opportunities to customize business ownership to fit the needs and circumstances of the owners. Here is what you should know about LLC ownership.
The Basics of LLC Ownership
The owners of LLCs are called members. LLCs can have an unlimited number of members whose membership interests are usually expressed in one of two ways:
- by membership units similar to corporate shares; or
- by percentage.
The terminology you choose for membership should match your vision for the company. For example, if the business is owned primarily by your family, identifying the membership interests by percentages may keep things clear and straightforward. However, if you intend to seek funding from individuals outside of the family, you may find that labeling the ownership interests as “membership units” simplifies the transfer of ownership rights.
Establishing LLC Ownership Rights
To be an LLC member, some form of contribution is required. However, the contribution need not be cash. LLC members can also contribute property or services. Additionally, LLC ownership rights and distributions can easily be customized. For example, if one member contributed 40 percent of the capital in an LLC, that member and the other LLC members may still choose to split profits 50-50.
Generally, LLC members are entitled to share in the company’s profits and losses, vote regarding key LLC matters, inspect and review the books, and enjoy a host of other rights. These rights stem from default state laws. However, they may be customized through agreements among the members, such as the operating agreements we craft at Leigh Hilton, PLLC. Operating agreements may include these common customizations:
- Distributing profits and losses in a way that does not match the members’ capital contributions;
- Creating different classes of ownership to reflect passive investor rights; and
- Mandating member meetings.
Transferring Membership Interests
Death, incapacity, and sale are the primary events that trigger transfers of membership units. However, suppose you intend to transfer membership units to investors. In that case, we can help you navigate unforeseen issues, such as whether your interest is a security under federal securities laws, family issues, and secured financing.
LLC members can choose to be managed either by the LLC members or by managers selected by the members. Leigh Hilton, PLLC will help you decide which management structure is right for you and your business. Unfortunately, we’ve seen clients who fail to clearly outline who gets to make decisions for their LLC, which causes power struggles between the members and the managers. If decision-making authority is not clear, the resulting uncertainty can hinder the effective management of the LLC.
If you are considering creating an LLC, our team of experienced attorneys can help you develop the right ownership structure for your business. Call our office to schedule a virtual or in person meeting.