A limited-liability company, or LLC, is composed of owners, or members, who benefit from the profits of the business and may share control in the business. Unlike most business organizations, absent an agreement by all of the members of the LLC, ownership percentage has no real effect in terms of the governance and financial benefits. To increase the traditional benefits associated with ownership, control and financial return, you need to amend the operating agreement.
An LLC is an entity that combines the best aspects of a corporation and partnership. Like a corporation, the ability of owners to control the company’s day-to-day activities can be limited. Also, an LLC offers its owners liability protection, which means that in most cases the owners will not be personally liable for the business’s liabilities. The LLC is also a flow-through entity like a partnership. The annual income and deductions generated by the LLC are divided amongst the owners, which the members than include in their personal tax return and pay the resulting taxes. LLC legal standards vary because they are organized under state law. The Revised Uniform Limited Liability Company Act is an attempt to unify LLC standards across the country. It is endorsed by the American Bar Association, adopted in five states, and is being considered in four others as of September 2011.
The ownership rights and obligations of members are defined by the underlying state law and the operating agreement. An operating agreement is what creates the LLC and also establishes the rules and guidelines by which the business operates. There are two types of LLC management structures. Member-managed LLCs grant all members equal rights when managing the company regardless of percentage of ownership. Manager-managed LLCs designate representatives or officers to run the company in the operating agreement, again separating managing control from ownership percentage. Also, under LLC law, LLC members get equal shares of any distribution. So in most cases, absent specific clauses in the operating agreement, percentage ownership in the LLC does not matter in a practical sense.
Receiving Greater Benefits
Altering the operating agreement is the only way to break away from the norms established by the law. If you seek to maximize your control over the business, you will need to make the business manager-managed with yourself as the manager. This manager status will allow you to control the day-to-day operations of the business. However, the sale of substantial amounts of the LLC’s property, a merger, amending the operating agreement, or any act that would be outside of the ordinary course of the LLC’s business still requires the unanimous support of the other LLC members. The requirements for amending an operating agreement is established when the LLC is formed in the original agreement. Consult the operating agreement for your LLC to determine what needs to be done to make the necessary changes you need to alter your LLC’s operating rules.
If you are considering changing the ownership structure or percentages in an LLC, consult with a licensed attorney in your area to ensure that you comply with all of the necessary legal requirements. While every effort has been taken to ensure that this article’s completeness and accuracy, it is not intended to be legal advice.
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.