Who Owns an LLC? (LLC Structure Guide)
A limited liability company (LLC) is a business entity that is very popular in the United States. It mostly protects its owners from any personal responsibilities for liabilities incurred in the business.
The ownership of an LLC depends on various factors, which when combined answer the ownership question.
As a business consultant specializing in LLCs, I gained over a decade of practice helping clients with LLC formation, management, and business structure. I'll provide you with a comprehensive guide regarding ownership in an LLC.
Quick Summary
- An LLC can be owned by an individual, several members, a corporation, or legal entities.
- The structure of an LLC features pass-through taxation, wherein earnings are reported on the member's individual tax returns.
- According to a report published by Tax Policy Center, the number of tax-through businesses have been growing gradually over the years, with over 80% of businesses being organized as as flow-through entities by 2015.
- As a small business owner, I observed the increasing trend of businesses opting for tax-through structures, prompting me to reconsider my own business organization to align with the prevalent shift.
Who Owns an LLC?
LLCs can be owned by individuals (single-member LLC or multiple-member LLC), corporations, or other LLCs. The ownership structure is contained in the operating agreement.
The type of ownership will largely dictate the tax treatment of the LLC, liabilities, and other issues.
Multi-member LLCs are owned by two or more people (and sometimes entities) who have an equal right to participate in management decisions through voting rights or similar means.
1. LLC Members With an Economic Interest
Most LLCs are single-membership LLCs, meaning they have only one owner.
That said, the owners of multi-member LLCs are called members (also referred to as . "LLC members" or "owners") with an economic interest in the LLC.
LLC members contribute money, property, and services (e.g., labor) to a business venture, expect profits from that venture, and share in distributions of LLC profits.
"An LLC with several owners is known as a multi-member LLC, where ownership is shared in percentages and profits or losses are allocated based on those shares."
- Jon Morgan, CEO, Co-Founder & Editor-in-Chief of Venture Smarter
The number of LLC members is unlimited in most states, but there has to be at least one member, an individual, or a legal entity.
The member has a "membership interest" in the LLC and the privileges provided by the statute and operating agreement of the LLC. This applies whether contributing money or receiving an ownership interest for services or an obligation.
2. LLC Members With a Non-Economic Interest
Non-economic LLC members are not entitled to share in the profits and losses of an LLC, i.e., there is no LLC ownership interest involved.
However, they still have personal liability for their contributions and any debts incurred by the LLC.
Non-economic LLC members may be people outside of your company who help out with management but do not invest money into it.
For example, a managing LLC member can be a friend who acts as an adviser on a project without putting cash into it. They can also be related to you, such as family members or your spouse's parents.
3. Assignees
An LLC member can be an assignee. An assignee has the right to receive distributions from the LLC.
Assignees are similar to LLC members because they both have ownership interests in the business, except that LLC members elect a chief executive officer, vote on company policy, and provide a signature when filing LLC Articles of Organization while assignees cannot.
Assignees can receive the company's profits and losses or receive payments for professional services rendered to the business.
For example, if a company provides technical consulting services and employees are assigned a membership interest in the profits of that assignment, then they will earn money accordingly.
Many small business owners allow economic benefits to the assignees. This is because the assignee can still get the economic portion of the original member's interest, allowing the assignee to profit from the interest while keeping them from controlling the company's assets or having any managerial function.
Assignees are not liable for the company's debts; they don't have to pay taxes on what is assigned, since it belongs to another entity and doesn't create liability for them with their own personal assets.
Assignees are given a financial stake, but they don't get a vote in company affairs. It's the same as having a silent partner who benefits financially but has no say in the day-to-day workings.
The Structure of Limited Liability Companies
A limited liability company is a business structure that provides the limited liability features of corporations and the tax efficiencies (e.g., pass-through taxation) of a sole proprietorship and partnership.
The growth of pass-through entities has been soaring over the years, with pass-throughs accounting for over 50% of total business net income, according to a report by the Tax Policy Center [1].
An LLC can be organized as:
- Single-member LLC
- Member-managed LLC
- Manager-managed LLC
- Series LLC
The liability protection of an LLC structure is similar to that for shareholders in an S corporation or partners in a partnership—the LLC members are not personally responsible for debts beyond their investment.
However, they still have "ownership" and participate in business management. Like those other tax structures, forming one does not create a taxable event unless you choose C corp taxation for your LLC.
As reported by the Institute for Economic Policy Research, the peak in the number of tax returns filed by C-corporations occurred with the enactment of the Tax Reform Act of 1986 (TRA86) [2].
Subsequently, it declined with an increase in pass-through entities, particularly S-corporations and partnerships [3].
The shift in tax returns from C-corporations to pass-through entities like S-corporations and partnerships explains the attractiveness of structures like LLCs, reflecting a changing landscape in business organization preferences.
Related Articles:
- How to Find an LLC Owner
- Limitations on Deductibility of LLC Members - Share of Losses
- Change Ownership Percentage of LLC
FAQs
How Is Ownership of an LLC Determined?
Ownership of an LLC is determined by capital contribution, which translates into ownership percentage. The operating agreement indicates the ownership interest of each member.
Can an LLC Owner be the CEO?
Yes, an LLC owner can be the CEO (Chief Executive Officer). But it's important to note that the terminology used in LLCs is typically different from that used in corporations. In an LLC, the owners are referred to as members, and the person in charge of the overall management and decision-making is often called a manager or managing member.
Can a Professional LLC Be Single-Member?
A Professional LLC can be single-member, but they also can have multiple LLC members, some or all of whom have to possess a professional license before they can be owners of an LLC.
References:
- https://www.taxpolicycenter.org/briefing-book/what-are-pass-through-businesses
- https://siepr.stanford.edu/publications/policy-brief/how-do-tax-policies-affect-individuals-and-businesses#45
- https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
