LLC Members With Uneven Ownership
Despite what the graphic may imply, uneven ownership in an LLC does not necessarily mean an unfair distribution; there may be a number of reasons LLC members may decide to own an unequal share in the company. For instance, some members may have contributed more capital to the LLC and therefore demand a larger ownership interest, or a member may be a silent partner and wish to contribute only a small amount to the company in exchange for a small share. Regardless of the reason, the LLC ownership structure is flexible enough to allow for any distribution of ownership among the members.
You do not need to specify the ownership structure in your LLC’s Articles of Formation, though some states may require you to list all members. However, the distribution of shares should be clearly described in the Operating Agreement or in a separate document — usually a profit sharing agreement or profit share contract — that has been incorporated into the Operating Agreement. Unlike other business entities like corporations and partnerships, the ownership interest in an LLC does not have to directly relate to the member’s contribution to the LLC. Uneven ownership is possible even when members have contributed evenly, and equal ownership is possible even when the members have contributed unequally.
You may want to give ownership interest commiserate with the member’s investment in most cases, but you may distribute ownership in any way that you and your partners, fellow members, or board of managers agree.
How are distribution made or withheld IF the Operating Agreement does not address distributions?
It depends on the state law, which varies from state to state. Typically, distributions will match the relative contributions of each member to the LLC. For instance, if one member contributed $1,000 and another member contributed $3,000, the first member will receive 25% of the distributions and the second member will receive 75%. Without any sort of clear indication as to the members’ relative ownership, the state will usually expect that distributions are divided evenly.
Thanks for your question, Gordon!
I was listed as a member on my husbands LLC and his son was listed as a manager. Then our names were removed, but my husband relisted our names when he filed his Franchise Tax. My husband is the Member/Manager and me and his son are Member/Member. If Im not listed on the LLC but only on his Franchise Tax am I still an owner of the company?
Thank you for your question, Donna. Your situation is very specific and personal, and I would want to have some more information before I felt comfortable giving you any answer or recommendation. Though I am an attorney, I am not permitted to provide you legal advice unless your LLC resides in the state I am licensed to practice in. If you would like to e-mail me (you can find my contact information at the top of the website), I can help you find an attorney in your state who can help.
Hi,
I’m confused about one thing.
Members of an LLC can have ownership interest that is not proportional to their capital contribution, correct?
If so, why don’t people take advantage of this during estate planning? It seems like a married couple’s entire estate could be passed down through an LLC in which their child held a 99% interest.
Instead of “gifting” a small ownership percent to your children, why don’t family’ just make make their children members with 99% interest in the LLC?
Paul
Interesting idea, Paul. This could work, except for the fact that you still have to pay income tax on LLC distributions. With a will, you may claim a $1+ million estate tax exemption, making it a better idea for the vast majority of testators.
Before you consider doing anything creative with your estate plan, it would be a good idea to speak with a licensed attorney in your state.
Can distributions be set up at a different ratio than ownership? Can it be set up contractually that over time a founder can offer an increasing percentage of distributions to a up-and-coming member?
My guess would be no, Fred, but it would depend on the laws of your particular state. However, you can have additional forms of compensation in the form of salary or bonuses that would achieve the same end result without endangering your intended ownership shares.
Please confirm that I understood this correctly: It’s possible for two members to make different initial capital contributions, and yet be equal owners? If I contribute $60k in cash, and the other member contributes $15k in copyrights, the Operating Agreeement can say that we each have 50% ownership interest? If so, how does this translate to our capital account balances?
Each state has default statutory rules that apply in the absence of clear statements in the operating agreement overruling the default rules. Typically, the statutory default provision would be that a member’s ownership interest is equal to the percentage of his capital contribution.
However, if the operating agreement clearly outlines that each member’s share of ownership, profits and losses, and distributions on dissolution are equal, then they are equal regardless of any individual member’s initial capital contribution.
This is an issue that is sometimes wrangled over, though, and many startups make mistakes in creating their operating agreements. This may result in outcomes that none of the members expect or want. It is important to enlist the aid of an attorney in your state who knows what your state’s default provisions are and what can be modified with an operating agreement.
Thank you for your question.
So, in a two-member LLC, with member 1 contributing $100 and member 2 contributing $200, upon dissolution and winding up of the LLC, does member 1 need to pay member 2 $50 to equalize the losses between the two? (LLC is dissolving because it is not profitable and for this scenario it’s insolvent).
Basically, if a two-member LLC has NO operating agreement, what happens upon dissolution if one member contributes more than second member? Are the excess contributions lost, or may member one demand payment from member two? Does it make a difference if the member who puts more $ into the LLC treats the $ he gives the LLC as a “loan” vs. a “capital contribution”?