In business, as in life, things sometimes change. LLC ownership percentage may need to be adjusted from time to time to meet new demands, manage new circumstances or welcome new partners. The good news is that changing partner ownership in an LLC can be a simple, painless change that supports your business growth.
If you’re looking for guidance on how to manage the process, start here. In this guide, we’ve included everything you ever needed to know about how to change partnership ownership in your LLC.
Establishing LLC Ownership Percentages
When you have a multi-owner LLC, ownership is assigned to members rather than shareholders. That’s a big advantage when it comes time for tax season because taxes are paid individually by the members based on their share of the LLC’s profits. The stake that each owner or member has in an LLC is referred to as their percentage share.
While many LLCs will divvy up ownership percentages to correspond with initial cash investment in the company, this isn’t always the case. That’s because the rules corporations have to abide by when splitting up ownership don’t apply to an LLC.
If you want to divide percentage shares in an LLC based on services, time, original ideas or expertise, you can do that too. In fact, LLC ownership percentages can be completely unrelated to the initial cash investment in the business.
The ownership rights align with your votes. That means that those with larger ownership percentages have more influence on important decisions. Your vote will weigh more.
Ownership rights also align with personal liability. If you need a business loan, everyone with more than 20 percent of percentage share will be responsible for providing a personal guarantee. If the business defaults on a loan, those with a larger percentage share will be responsible for paying the loan off.
Ownership percentages need to be outlined upfront. When you first set up an LLC, you will need to designate your ownership rights. These are represented as ownership percentages. These ownership rights are flexible, but they need to be established right away. This will need to be outlined in your operating agreement.
Reasons for LLC Changing Ownership Percentages
Business structures change over time, people come and go, some businesses grow quickly and some get into trouble. There are many reasons an LLC would want to change the partnership ownership structure they started with. Here are a few of the most common reasons you might consider it for your LLC.
You Put in More Money
Your business has an opportunity to grow and you or one of your partners fronts some extra cash to help jumpstart the growth. In this case, the partner who invested now has more to lose. They may want to own more of the company or increase their ownership percentage to account for the bigger risk and higher stake.
You Start Working a Lot More
Maybe you and your partners started your LLC as a side hustle as you continued to work a full-time job to pay the bills. Now that your LLC is making more profit — and requiring more of you — you quit your day job to work at the LLC full time. In this case, you might want to increase your ownership percentage to account for the increase in sweat equity, not to mention the risks associated with leaving a steady job.
You Can’t Afford to Pay a New Hire, But You Need Help
Perhaps the LLC has a need for new talent but not a lot of overhead to pay a salary or fee for new employees. Bringing on an employee to help fill the need and offering some ownership percentage in lieu of a salary or to offset a low fee could work out to everyone’s benefit.
You Want to Apply for a Business Loan
Everyone who has a 20 percent or larger percentage share in your LLC will be required to personally guarantee any business loan your LLC applies for. If a partner is not in a position to guarantee a loan, then the ownership percentage may need to be transferred so that partner has less than 20 percent.
You Sell and Move On
Ownership percentages may need to change when you sell your LLC. As an LLC member, you have the power to decide to sell off your percentage of the LLC just as you would sell stock in a company to another party. If you own a single-member LLC, you can even sell a percentage of the LLC to a new partner.
Of course, there are countless other reasons an LLC might want to transfer ownership percentages. People come and go, either to retire, leave for a new opportunity or through divorce, illness or death. In these cases, their ownership percentages will need to be changed to reflect the new member ownership structure.
How to Legally Change Partnership Ownership in an LLC
You probably already anticipated this circumstance when you drew up your operating agreement. Your operating agreement should include buy-sell provisions that explain how owners can transfer their membership percentages among themselves. If your operating agreement includes the names and ownership percentages of each partner, then you will need to file new paperwork, including a new operating agreement, with the state.
If your paperwork was general and did not specify names or percentages, then you can keep the paperwork as-is. After you’ve reviewed your operating agreement carefully and revised your paperwork, the final step will be to issue new membership certificates that show the new percentages for each member owner of your LLC.
If your operating agreement does not have buy-sell provisions or if you don’t have an operating agreement in place, things will get trickier for you. You’ll want to carefully refer to your state’s laws to know how to proceed. In some states, your LLC may need to dissolve if your operating agreement does not include provisions for transfer of ownership, but you need to do it.
Who to Tell About Your Change in Ownership
The IRS: If a member leaving the ownership is listed as the Responsible Party with the IRS, the IRS will need a new responsible party.
The Registered Agent: The Registered Agent will also need all contact information for any new owners.
The State: This includes states where you are considered a foreign entity and the changes can often be announced in your annual report.
The Bank: If the transfer of ownership affects any loans from the bank or other lenders, the bank may need to approve the new owner(s) or transfer of ownership.
No matter where you are now, it’s important that you visit your operating agreement and review the provisions included for transferring ownership. Be prepared so that if the time comes when you need to transfer ownership percentages, you can do so legally and painlessly.
Incfile is here to support you as you start your LLC, grow your business and adapt to changes. Having a one-stop shop to guide you and your LLC through all of its transitions can help make them as painless as possible, freeing you up to focus on growing your business.
Nicole Bowman is a freelance writer who thinks turning research into stories is the best gig ever. She started writing billboards back in 2002, worked in book publishing in New York for many years and now she creates all sorts of engaging content for the web. Nicole lives in Rehoboth Beach, DE, with her husband, two sons and their poodle, Tootsie. She loves the great outdoors, bookstores and tennis.