How Can You Change the Ownership Percentage of an LLC?
If you're a business owner, you may want to change the ownership percentage of your LLC at some point, whether adding new members or adjusting current ownership stakes. Luckily, this process is relatively easy.
Our team of attorneys and legal advisors specialized in LLCs have shared their experience and extensive knowledge to guide you through changing ownership percentages for your LLC.
In this article, we’ll walk you through the steps necessary to adjust the ownership stake levels of an LLC as per the operating agreement.
Quick Summary
- Changing ownership percentages in an LLC requires amending the operating agreement with all members' consent and updating state and tax records.
- Ownership percentages dictate each member's share in the LLC, affecting both decision-making and profit/loss distribution.
- The US Small Business Administration highlights that 33.3 million small businesses account for 99.9% of all US businesses, underscoring the importance for these entities, particularly LLCs, to understand the procedures for modifying ownership percentages in response to evolving business needs.
- In my view, the ability to adjust LLC ownership shares is crucial for maintaining fairness and motivation among members as the business evolves.
What Are Ownership Percentages?
Ownership percentages are the shares each LLC member or partner holds in the company [1]. These percentages play a crucial role in decision-making and profit/loss distribution.
Therefore, maintaining accurate ownership percentages is vital for smooth operation and fair allocation of profits and losses.
1. Establish Company Ownership Percentages
To establish company ownership percentages, consider the initial contributions made by each member of the LLC. This includes any cash or equipment and any loans funding the LLC.
This foundational step is especially pertinent given that, according to the US Small Business Administration, between March 2021 and March 2022, 1.4 million US establishments opened, indicating a vibrant and evolving business landscape where clear ownership structures are essential [2].
You’ll then need to document these initial contributions and have them agreed upon by all members.
In our case, we used an LLC Operating Agreement (you can also use a Member Agreement) to dictate ownership percentages to avoid disputes and conflicts in the future.
You should also consider additional factors that may impact the distribution of ownership while establishing the company ownership percentages. These factors may include members' involvement level, specialized expertise, and future contributions.
2. Understand the Importance of Ownership Percentage
Why is ownership percentage important?
The ownership percentage is important, as it determines the profit ratio allocated to each owner, influencing decision-making and profit distribution.
Your voting rights also directly relate to the number of shares you hold in an LLC. Thus, the more control you have over the entire business, the greater your influence on its management and future direction when making critical choices.
As a business owner, you may also have additional legal responsibilities besides the above, which can cause further problems.
For example, if a business fails and you take out a business loan against it, your personal liability for repayment may be increased.
Therefore, by understanding the impact of your percentage of ownership, you can leverage your influence to direct the company's future.
3. State the Reasons for Changing Percentages
Once you establish the ownership percentages, you can adjust them through a vote of the members or an amendment to the operating agreement.
However, note that changing ownership percentages may have tax implications, and we recommend consulting with your legal or financial professional.
Here are some of the most common reasons to change the ownership level of an LLC:
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 a Limited Liability Company owner dies, their shares must be transferred to another individual or entity, and the percentage must also be amended.
5. Acquiring a Business Loan
If a business gets a large loan, the lender may ask the owners to amend their ownership percentages to apply more equitable terms.
You can use personal assets like cars or homes as collateral for a business loan to grow your business or may serve as an additional source of income above and beyond the regular cash flow.
Whatever the reason, we advise following the correct process for changing the ownership percentages of your LLC.
4. Modify the Ownership Percentage of the LLC
There are a few things we recommend taking into account when changing the 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 you need to follow.
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, you will need to prepare a buy-sell agreement outlining how the ownership percentage can be amended.
3. Notify the State
Once the operating agreement is amended, you must notify the state of the change in the business ownership percentages. You’ll file a Certificate of Amendment with the secretary of state.
4. Notify Other Parties
After you modify ownership percentages and the operating agreement, you must notify other parties, such as a small business loan lender.
"It's important to note that changing ownership percentages of an LLC can have tax implications."
-Jon Morgan, Co-Editor & Co-Founder of Venture Smarter
If you’re unsure of those implications, we advise you to consult a tax professional before making any changes.
Similar Articles:
- Transfer Ownership of an LLC
- How to Split Ownership in an LLC
- What Is the Owner of an LLC Called
- How Do You Find Out Who Owns an LLC
FAQs
How Do You Restructure LLC Ownership?
You restructure LLC ownership by filing a Certificate of Amendment with the secretary of state notifying them of the change in ownership stake. The steps for restructuring the LLC ownership will depend on the state in which the company is registered.
Can LLC Members Own Different Percentages?
Yes, LLC members can own different percentages, which is one of the key benefits of forming an LLC. However, you must amend the LLC operating agreement to reflect the change in ownership percentages if one member wants to buy or sell their shares in the company.
How Do You Split Ownership of an LLC?
You can split ownership of an LLC by creating a buy-sell agreement that outlines the transferring ownership of the shares. All owners of the LLC should sign this document the same way as the operating agreement.
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.
References:
- https://www.scirp.org/journal/paperinformation.aspx?paperid=110995
- https://advocacy.sba.gov/wp-content/uploads/2023/11/2023-Small-Business-Economic-Profile-US.pdf
