How to Split Ownership in an LLC (Fair & Effective Methods)

Jon Morgan
Published by Jon Morgan | Co-Founder & Chief Editor
Last updated: February 8, 2024
Methodology
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Dividing ownership in an LLC is straightforward when you adhere to state regulations and your operating agreement. This ensures that all owners get their fair share of profits and losses, without compromising the business's limited liability shield.

Having spent over ten years advising LLCs and diving deep into the subject, I'm here to offer a thorough guide on how to properly and legally share ownership in an LLC.

Quick Summary

  • To split ownership in an LLC, consider drafting a clear and comprehensive operating agreement that outlines member roles, responsibilities, and ownership percentages.
  • In a single-member limited liability company, the assets and losses belong to the owner while a multi-member LLC distributes ownership equitably.
  • 72% of LLCs do not have a written operating agreement in place, potentially leading to disputes and challenges in ownership distribution, according to a study by the National Small Business Association.
  • From my experience, prioritizing open and transparent discussions among LLC members can help build trust and mitigate conflicts, leading to a more prosperous and cooperative business venture.


How to Split Ownership in an LLC?

To split ownership in an LLC, consult the operating agreement, follow state laws, and finally determine the distribution of ownership interest.

Step 1: Consult the LLC Operating Agreement

To split ownership interest in an LLC, you will need to draft an LLC operating agreement.

This operating agreement document will outline how profits and losses are divided among members and other controlling provisions such as voting rights and management structure.

It is vital to have a solid operating agreement in place so that everyone involved knows their rights and responsibilities.

Step 2: Check State Laws

State rules will dictate how profits and losses are divided among members in the absence of an operating agreement. It's essential to check your state law before splitting ownership to ensure you're following the correct procedures.

Step 3: Proceed to Split Profits and Losses

A man studying how to split LLC ownership

Member's LLC ownership percentage and capital contributions are the two most important factors in the division of LLC profits and losses.

LLC members will split profits and losses equitably based on the amount of capital infused into the company and the percentage equivalent.

If one member contributes more money or assets to the LLC, they may be granted a more significant member's ownership interest or percentage ownership.

Member's capital contributions in LLC ownership percentage determine percentage interest. Members' ownership interests and percentages are usually set out in the company's operating agreement.

A member's percentage interest may also be increased or decreased by the contribution of additional capital to or withdrawal of capital from the LLC, respectively.

The Role of an Operating Agreement

An operating agreement is a foundational document that outlines the internal operations of a Limited Liability Company (LLC). It's akin to a partnership agreement or a corporate bylaw, tailored specifically for LLCs.

This agreement is a binding contract among the members of the LLC and provides a framework for how the business will be run, detailing aspects like management structures, financial procedures, and member duties.

"The agreement should include instructions for proceeding when some members are absent and the agreed-upon process for selling or terminating the limited liability company as a business."

- Rudy Robles, Bookkeeping and Payroll Supervisor

Why It's Crucial for Defining Ownership Stakes

Clarity and Transparency

An operating agreement clearly delineates the ownership percentage of each member, ensuring that there's no ambiguity about who owns what. This clarity can prevent potential disputes and misunderstandings down the line.

Flexibility in Distribution

Unlike corporations where distributions are typically based on the number of shares held, LLCs offer flexibility. The operating agreement can specify unique distribution methods, allowing members to divide profits and losses in ways that might not directly correlate with their percentage of ownership.

Decision-making Power

The agreement can define how decisions are made, whether they require unanimous consent, a simple majority, or another method. This is especially important when ownership percentages are uneven, ensuring that every member's voice is heard and their interests are protected.

Protection in Legal Disputes

In the event of internal conflicts or external legal challenges, the operating agreement serves as a reference point. It can be used in court to demonstrate the agreed-upon terms and conditions of the LLC's operations, providing protection to members.

Customization of Roles and Responsibilities

Beyond just ownership, the operating agreement can detail the specific roles, responsibilities, and expectations of each member. This ensures that everyone is on the same page regarding their contributions to the business.

Ownership in a Single-Member LLC

Ownership in a single-member LLC makes profit allocation easier because there is no profit sharing with other members. The owner simply takes whatever profits are earned from the business after settling liabilities or taxes.

The owner is not required to pay self-employment taxes on income generated from the LLC, but they are responsible for paying income taxes on profits earned. The company itself does not bear any federal or state taxes [1].

According to the CorpNet, for 2022, LLC members are subject to a 15.3% self-employment tax on the first $147,000 of net earnings, which includes a 12.4% Social Security tax and a 2.9% Medicare tax, highlighting the tax obligations beyond just income taxes on profits earned by LLC owners.

Ownership in a Multi-Member LLC

A presentation meeting between team members

The LLC's operating agreement defines the member's capital contribution and percentage of ownership in a multi-member LLC.

A special allocation clause in the operating agreement can be used to split profits and losses among the members that are proportional to their ownership interests.

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FAQs

Do LLC Members Have Equal Ownership Percentages?

LLC members have equal ownership percentages if they all contributed the same amount of capital. If this is not the case, the profit allocation is equitable.

Can Members Take Unequal Distributions?

Members can take unequal distributions if they infuse the same amount of capital into the company. You may hire a law firm to ensure equitable division.

Can a Member of an LLC Have 0 Ownership?

A member of an LLC cannot have 0 ownership since all members are automatic owners. A business partner or an outside investor of an LLC is referred to as a ‘disinterested party’ and do not have an ownership interest.


References:

  1. https://www.corpnet.com/blog/do-llc-owners-pay-self-employment-tax/

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