If you start an LLC with other people, you'll have to decide how to divide ownership, profits, and losses.
Usually, ownership of the company is split in a way that reflects the contributions each owner makes to the LLC. Profits and losses are typically allocated in the same way. However, most state LLC laws give owners the flexibility to structure ownership and profit distributions in a different way.
Your LLC's operating agreement should describe the way ownership is divided. It also should include controlling provisions on the way profits and losses will be split among the owners. If your LLC doesn't have an operating agreement, you'll divide things up according to your state's laws. In some states, that may mean the LLC is divided equally.
Ways to Divide Ownership of an LLC
Equity can be divided among an LLC's owners, also known as "members," in two ways.
- Membership interests: Similar to stock in a corporation, membership interests are units of ownership in the company. It's possible to have different classes of membership interests in an LLC with different sets of rights, just as a corporation can have different classes of stock.
- Percentage ownership: LLC owners can also divide their ownership by percentages. For example, an LLC owned by spouses might split ownership 50-50. Or in a three-member LLC, one member might own 60% of the LLC while the other two own 20% each.
Regardless of the method you use, most LLCs split ownership in proportion to each owner's contributions to starting and running the company. These contributions might consist of money already contributed, money to be contributed in the future, services, or assets.
LLC ownership doesn't have to be divided according to contributions. LLC owners can agree to split ownership in any way they choose.
For example, suppose Ben and Jen start an LLC. Ben contributes $60,000, and Jen contributes $40,000. Ben would typically own 60% of the company and Jen would own 40%. But if Ben contributes $60,000 and Jen manages the business but didn't make any other financial contribution, they might decide to split ownership so that Jen owns 60% of the company and Ben owns 40%.
How Profits Are Divided in an LLC
Usually, profits and losses are split in an LLC according to the members' ownership interests or percentages. However, LLCs have the flexibility to divide profits and losses differently.
For example, if Ben and Jen each own 50% of their LLC, they could each be allocated 50% of the company's profits and losses. Or they could do what's known as a “special allocation" and divide profits and losses differently, such as 70-30. The Internal Revenue Service scrutinizes special allocations closely, so it's best to get tax advice if you want your LLC to divide profits and losses in a different way than ownership is divided.
If your LLC is going out of business, you'll divide the LLC's remaining assets among the members, usually in proportion to their ownership. Before you can do that, you'll need to vote to close the business, notify creditors, pay off any debts, and wrap up the LLC's business. You may also have to file dissolution paperwork with your state.
If the LLC has assets after the winding-up process is complete, you'll distribute them to the owners in the way specified in your operating agreement. If the operating agreement doesn't explain how to divide the assets in dissolution, or if you don't have an operating agreement, you'll follow your state's LLC laws.
The ownership structure you choose for your LLC will determine how decisions are made and profits and losses are divided. Before you form your LLC, get legal and tax advice on dividing ownership. And be sure everything is spelled out in your operating agreement so you have a roadmap for avoiding disputes later on.
This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.