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
- To change ownership percentages of an LLC, you need to amend the operating agreement or draft a new one.
- Start by discussing the changes with all members and getting their agreement. All members must agree to the changes and sign an amendment to the operating agreement.
- Then, file the necessary paperwork with the state and update any tax forms. Consult with legal and financial professionals before making any changes to ensure proper compliance with state laws.
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.
You’ll then need to document these initial contributions and have them agreed upon by all members. You can use either an LLC Operating Agreement or 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?
According to the LLC operating agreement, the ownership percentage is important because it determines the ratio of the profits allocated to each owner and the ownership stake.
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 you should consult with a 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, it's essential to follow the correct process for changing the ownership percentages of an LLC.
4. Modify the Ownership Percentage of the LLC
There are a few things you need to take into account when changing llc 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.
If you’re unsure of those implications, it's best to consult a tax professional before making any changes.
FAQs
How Do You Restructure LLC Ownership?
You can 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?
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.
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’re 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.
Can an LLC Be Split Into Fractions?
An LLC can be split into fractions. You may alter the ownership level to make sure all shares are equal. The alteration can happen if a new person joins or if one of the members wants to sell their share.
If any of these situations occur, you may also need to make other changes, such as loan agreements and creditor notifications.
You can only change an LLC's ownership percentage by following the correct steps, state regulations, and the operating agreement.
When changing ownership levels, please seek legal advice from a professional attorney specializing in this area of the law.
References:
- https://www.scirp.org/journal/paperinformation.aspx?paperid=110995
