Guide to LLC Ownership

LLC ownership is an exciting prospect for many entrepreneurs. But all the terms can feel overwhelming: distributions, capital contributions, membership, taxation, and more. In this guide, we’ll cover all the basics of LLC ownership so you can run your LLC with both confidence and compliance.

Who is an LLC owner?

Limited liability companies (LLCs) are very flexible business structures, so an LLC owner (also called a member) can be virtually anyone. In most states, LLC owners must be individuals 18 years of age or older. But sometimes, a corporation or another LLC can even be a member of an LLC. An LLC can have just a single member or even hundreds of members. In some states, you’ll include this information on your Articles of Organization.

LLC members usually gain ownership within the company by contributing capital to the business (though some LLCs have different arrangements for gaining ownership, such as putting in additional work). In exchange, they enjoy a share of the profits — and sometimes even management privileges.

In most cases, how much of the profits the members earn and their right to help run the business depends on how the ownership is divided in the LLC. But with LLCs, the members can also make different arrangements if they spell them out in the LLC’s operating agreement. For example, a member with 50% ownership might agree to take only 30% of the profits in exchange for having to do less of the everyday work for the company.

By the same token, management of the company and voting rights don’t have to be reflected in ownership percentages, either, though they often are. Again, the members can make their own arrangements as long as they write them all down in the operating agreement and all sign the document.

How is ownership divided in an LLC?

LLCs have the luxury of flexibility, so ultimately LLC ownership is defined by the LLC’s operating agreement (much like a constitution or charter). In the agreement, the LLC itself gets to set out each owner’s stake in the business, how members can be added or removed, transferring membership, how the LLC is managed, and more. The two most crucial components are arguably the LLC’s ownership structure and ownership percentages.

If you need help drafting an operating agreement, our customizable, operating agreement template can help.

LLC Ownership Structure

There are two common ownership structures for LLCs: a single-member LLC and a multi-member LLC. A single-member LLC is a limited liability company with a single business owner. Meanwhile, a multi-member LLC has multiple owners. And the operating agreement always dictates how to remove or add members down the road.

In multiple-member LLCs, the members can actually decide how much decision-making power each member has. For example, some LLCs might have two members that equally share responsibility for running the LLC, acting as a member-managed LLC. A different two-member LLC might have one member run the business while the second acts as more of a silent investor. Another LLC’s members might hire managers to run the business so they can be a manager-managed LLC. In these LLCs, members might assign different owner titles to convey their roles.

The real luxury is that the LLC’s members can set their own management structure in their operating agreement. It’s one of the many benefits of running an LLC.

LLC Ownership Percentage

Another aspect of LLC ownership is the ownership percentage of each member. In most LLCs, ownership matches the amount of capital each member contributes to the LLC. For example, let’s say that three business partners team up to create an LLC. One member contributes $50,000, and the other two contribute $25,000 a piece to help get the business up and running. The first member would own 50% of the LLC and the other two members would own 25% each. In this scenario, an LLC’s ownership resembles a corporation. But, as mentioned earlier, the ownership percentages don’t have to be dictated by capital contributions. 

Unlike a corporation, the voting power of the LLC’s owners doesn’t have to match their ownership percentages. The LLC can decide how much say each member has. For example, maybe the 50% owner doesn’t want to run the day-to-day affairs of the business; they just want to invest and enjoy a share of the profits. The other members would handle the daily management responsibilities.

An LLC’s operating agreement should clearly define the ownership percentages, voting rights, and structure of the business.

What are LLC capital contributions?

Capital contributions are investments that the LLC receives, often brought by the members. Often, capital contributions are cash assets, but sometimes members can contribute property and equipment for the LLC to use. The operating agreement should describe the monetary value of all assets each member contributes. It will also describe what happens to those assets if a member ever leaves.

There are three different types of contributions that LLCs can receive: equity investments, debt investments, or convertible debt.

Equity Investments

An equity investment is an investment given in exchange for a share of ownership of the LLC. Anyone who contributes an equity investment receives a share of the business profits. Depending on your operating agreement, they may also be entitled to help make business decisions. But since they get a share of profits, you won’t have to repay these investments.

Most starting members of an LLC bring an equity investment.

Debt Investments

A debt investment is a very common investment type for new businesses. They’re loans, usually requiring the LLC’s members to put up some sort of collateral. Sometimes you can get a loan without putting up collateral, but it’s uncommon and usually results in a smaller loan. Even though paying back a debt can be stressful, it allows you to raise some additional capital without changing the LLC’s membership.

Convertible Debt

Convertible debt essentially combines the other two types of contributions. If an LLC takes a convertible debt loan, they either promise to repay the debt or convert the money they owe into an ownership stake in the company for the lender. This contribution type gives an LLC a little flexibility for repayment.

What are LLC distributions?

After the LLC uses its capital contributions to get started, they’ll eventually make distributions. Distributions are the way LLCs pay their members from their profits. But when you make those distributions depends on two things: the LLC’s distribution schedule and your taxation structure. You’ll get to set your own distribution schedule in your operating agreement, and you get to choose which taxation structure you’ll have.

There are three key taxation structures: a pass-through entity, a C corporation, or an S corporation. Your structure will affect whether your LLC makes distributions before or after paying taxes. Making these distributions compliantly helps protect your personal liability.

Pass-Through Taxation

By default, the IRS considers both single-member and multi-member LLCs to be pass-through entities. The LLC itself doesn’t pay taxes; instead, it’s a separate entity that distributes its net profits among its members. The members report that income on Schedule C of their personal income tax returns. Usually, this process repeats on the state level.

In short, a pass-through taxation LLC makes distributions before taxes.

C Corporation Taxation

LLCs can elect to be taxed as a C corporation instead. If they do, the LLC itself will be taxed as a separate business entity, paying corporate income taxes on their profits before making distributions to its members. Then the LLC’s members will pay personal income taxes on their distributions. Tax professionals refer to this as double taxation. It might sound harsh, but in some cases, C corporation status can give certain tax breaks.

S Corporation Taxation

Electing S corporation status only applies to certain LLCs, but it allows an LLC to blend an LLC’s pass-through taxation with some of the tax breaks of a corporation. In particular, an S corporation’s members can deduct losses (even on their personal return) and deduct qualified business income. Since the LLC itself won’t pay taxes on its income, the distributions are made before any taxes are paid.

We highly recommend consulting with a tax professional to discuss which option is right for the unique ownership structure of your LLC.

We can help!

Whether you’re forming an LLC by yourself or with a full team, it doesn’t have to feel overwhelming. At ZenBusiness, we’ve got your back. Whether you need a zero-cost formation service, registered agent service, or guidance writing an operating agreement, we’ve got you covered. We’ll handle the paperwork steps so you can focus on what matters: making your business succeed.

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.