In 2021, American entrepreneurs broke the record with 5.4 million new business applications. And in 2022, 5.1 million were filed, meaning entrepreneurship is going as strong as ever.
If you’ve got a great business plan floating about in your head, then you might be joining the ranks soon by filing your own application. Most people go with forming limited liability companies (LLCs), as they offer the most advantages.
However, solo business ownership is challenging, so you may need partners. In that case, you’ll need to learn about LLC ownership percentage, which can affect what each person contributes and takes away.
Read on to get a quick guide on this topic so you know what you’re getting into.
What’s LLC Ownership Percentage?
When you create an LLC with other people, the inner workings will differ from that of a corporation. For instance, while corporation owners get stocks, LLC owners (or members) get a percentage of interest or membership units, which is similar to company shares.
Both of these choices give LLC owners the right to company profits, as well as the right to vote on major business decisions. The bigger your percentage, the more weight your votes will have.
With LLC ownership percentage, there’s more flexibility. There are strict rules for distributing company ownership for corporations, but generally speaking, you can do it however you wish with an LLC. The only thing is that the total must be 100%.
However, most people will choose to calculate percentages based on what each member has contributed to the LLC formation. The contribution doesn’t have to be financial either; it can be time, ideas, services, or experience too. It’s also a common scenario to see a 50/50 split between two partners if one is more hands-off but makes a significant financial contribution, and the other manages the business and makes no monetary contributions.
Recording LLC Ownership Percentages
However you decide to split ownership percentages, you must record the final decision in your company books when you form your LLC. This is known as the accumulated adjustments account (AAA); each owner will have their own AAA. These numbers should go in your LLC operating agreement.
An advantage to forming an LLC is that in most cases, you won’t have to really report ownership percentages besides tax return time. Of course, laws will differ from state to state, so be sure to do your due diligence to figure out what’s required of you in your area.
On that note, if you commit to the idea of an LLC, we at Business Anywhere can assist. We have company registration services that are quick and convenient.
Information About Business Loans
When assigning LLC ownership percentages to each member, keep in mind that anyone with an AAA of over 20% will have more personal liability. More specifically, if your LLC needs to apply for a business loan, these individuals will have to give a personal guarantee.
In the future, if you default on the business loan, these people will also be responsible for paying off the loan. So while a larger LLC ownership percentage comes with more weight for votes, it comes with more responsibilities as well.
Can I Sell My Percentage of an LLC?
Yes, you can sell your percentage of an LLC if you wish. This works in the same way as it would with a corporation.
In fact, even if you’re the sole owner of your company, you can sell a small percentage to a new partner and retain majority ownership.
Why You’d Change LLC Ownership Percentages
When you started the company, everyone was happy with how the percentages were distributed. You might’ve even been the only LLC member, which makes things a lot simpler.
However, circumstances change, and thankfully, LLC regulations allow you to change ownership percentages with little trouble. But why would you follow through with these actions?
For one, a member may put in more money, or put in more or less time than they did initially. Or you may need more help, so you want to bring in more LLC members to shoulder the burden. Or you might want to apply for a business loan, and the person who can guarantee it doesn’t have an AAA of at least 20%.
How to Change LLC Ownership Percentage
Even if you haven’t created your LLC yet, knowing how to change ownership percentage can be useful in the future.
The best-case scenario is that you’ve prepared for such changes already in your operating agreement. It should thoroughly list buy-sell provisions. If you don’t have such provisions and/or don’t have an operating agreement, then you’ll have to check with state laws to determine how to proceed.
Do note that if you kept things general in your operating agreement and haven’t specifically named owners and their percentages, you won’t have to fill out additional paperwork. However, if you’ve attached percentages to people, not only will you have to create a new operating agreement, but you’ll also have to file new paperwork with your state.
In addition, all members need to turn in their ownership certificates. They should be issued new ones that reflect the new ownership percentages.
There are several parties you’ll need to inform when you change the LLC ownership percentage:
- Your registered agent
- Your bank and other financial institutions that are stakeholders
- The state
- The IRS
Be Clear on LLC Ownership Percentage for Your Company
If you’re considering starting a company and you won’t be doing it alone, then you need to be clear on the topic of LLC ownership percentage. It can affect what you can (and can’t) do with the business, so make sure to get it right in the beginning.
The good news is that you can always change the percentages, so you’re not stuck. With this flexibility, you’ll have your options open for the future.
Do you now feel ready to start your own LLC? Then sign up with Business Anywhere today. We’ll have your LLC up and running quickly and easily.
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