Changing the ownership stake of an LLC is a relatively easy process, but there are a few things you need to take into account before making any changes.
Our colleagues, attorneys, and legal advisors specialized in LLCs have shared their experience and extensive knowledge to inform you how to change the ownership percentage of an LLC.
In this article, we will walk you through the steps necessary to change the ownership levels of an LLC as per the operating agreement.
What are Ownership Percentages?
Ownership percentages, also known as an ownership interest in an LLC, are the percentage of the company that belongs to a certain owner.
For example, if Jack and Jill own a business and Jack has 60% ownership, and Jill has 40%, then Jack owns 60% of the company and Jill owns 40%.
Sometimes it is necessary to change the ownership level of an LLC, for example, if a new owner wants to join the company or if one of the owners wants to sell their share.
How To Establish Company Ownership Percentages?
To establish company ownership percentages, you need to take into account who contributed to forming the business and if there was a contribution such as cash or equipment.
Before you can make changes to the ownership percentages of an LLC, you need to set them up in the first place.
You should also consider whether you have used any loans to fund the LLC.
Without considering all of these factors, changes in ownership can become disputes later on down the line.
So how are ownership percentages actually established?
You can use an LLC Operating Agreement or a Member Agreement to dictate ownership percentages.
Reasons to Change Percentages
There are several reasons to change the ownership level of an LLC, but some of the most common include:
1. Adding new LLC members:
When a new member joins an LLC, the percentage needs to be amended to reflect their percentage of ownership in the operating agreement.
2. Splitting the company:
If the owners of an LLC want to break up the company and each owner wants a different share, then the percentage of ownership will need to be amended as per the operating agreement.
3. Selling shares:
If one of the owners of a Limited Liability Company wants to sell their shares, the percentage of ownership will need to be amended to reflect the new ownership.
4. Death of an owner:
If an owner of a Limited Liability Company dies, their shares will need to be transferred to another individual or entity, and the percentage will need to be amended.
5. Acquiring a business loan:
If a business is getting a large loan, the lender may ask the owners of the business to amend their ownership percentages so that more equitable terms can be applied.
That is why you need to make sure you have an outstanding loan balance.
Personal assets such as a car or a home can also be used as collateral for a loan to grow your business, or may simply serve as an additional source of income above and beyond the regular cash flow.
Whatever the reason, it's important to follow the correct process for changing the percentage of an LLC.
This article will outline the steps you need to take.
Importance of Ownership Percentage:
Understanding your percentage is important because, according to the LLC operating agreement, it determines what percentage of the profits are allocated to each owner and the ownership stake.
Based on the number of shares that you hold directly relates to your voting rights.
While they don't always line up, they usually have something to do with it.
The more control you have over the entire business, the greater influence you have in its management and future direction when making critical choices.
Business owners have additional legal responsibilities in addition to the above, which can cause additional problems.
For example, if a business fails and you take out a loan against it, your personal liability for repayment may be increased.
By understanding the impact of your percentage of ownership on these things, you can leverage your influence to direct the future of the company.
Modify Ownership Percentage of LLC
There are a few things you need to take into account when changing ownership percentages of an LLC. Here are the steps you need to follow:
1. Check the company's operating agreement:
The first step is to check the company's operating agreement carefully. This document will outline how ownership percentages can be amended and what procedures need to be followed.
2. Amend the operating agreement:
If you can not find anything in the company's operating agreement, amend it to reflect your desired change and have all the owners sign it as soon as possible.
If there is no LLC operating agreement, then you will need to prepare a buy-sell agreement that outlines how the percentage of ownership can be amended.
3. Notify the state:
Once the operating agreement is amended, you will need to notify the state of the change in the business ownership percentages. This can be done by filing a Certificate of Amendment with the secretary of state.
4. Notify other parties:
If there are any other parties that need to be notified after you modify ownership percentages and the operating agreement, such as a small business loan lender, you will need to do that as well.
It's important to note that changing ownership percentages of an LLC can have tax implications.
If you are unsure of what those implications are, it's best to speak with a tax professional before making any changes.
If you find that you need to change ownership percentages of an LLC, then take these steps and do it correctly.
If you don't, you may have problems with your business in the future.
How Do You Restructure LLC Ownership?
The steps for restructuring the LLC ownership depend on the state in which the company is registered. Typically, you will need to file a Certificate of Amendment with the secretary of state notifying them of the change in ownership. You may also need to notify other parties, such as the business loan lender.
Can LLC Members Own Different Percentages?
Yes, LLC members can own different percentages. That's why you need to amend the LLC operating agreement if one of the members wants to buy or sell their shares in the company.
How Do You Split Ownership of an LLC?
To split ownership of an LLC, you will need to create a buy-sell agreement that outlines the transferring ownership of the shares. This document should be signed by all the owners of the LLC, like the operating agreement.
What Are the Tax Implications of Changing the Ownership Percentage of an LLC?
The tax implications of changing the ownership percentage of an LLC depend on the state in which you are registered and whether or not the transfer is considered a gift. A tax professional can inform you of all the necessary tax implications and help you determine if there will be any financial impact on your company.
Can a Member of an LLC Have Zero Ownership?
Yes, a member of an LLC can have zero ownership. In this case, the member would not have any rights or responsibilities with regard to the company, as stated in the operating agreement.
In conclusion, an LLC can be split into fractions. To make sure all shares are equal, the ownership levels should be altered if a new person joins or if one of the members wants to sell their share.
You may need to make other changes, such as loan agreements and creditor notifications if any of these situations occur.
The only way you can change an LLC's ownership percentage is by following the correct steps and abiding by state regulations and the operating agreement.
If you have any questions, it's best to consult a professional.
When changing ownership levels, please remember to seek legal advice from a professional attorney who specializes in this area of the law.