A limited liability company, or LLC, is an independent legal entity. This means that an LLC is separate from the people who own the company, and the owners are not personally liable for the debts of the business. Unlike in a corporation, owners are not stockholders who own shares of stock as evidence of their ownership interest. LLC owners are referred to as members, and ownership is reflected by keeping an account of their percentage ownership of the company in relation to other members.
One way to establish that you are the majority owner of an LLC is to contribute 51 percent of the initial capital. Contributions may include money but also other property, such as equipment or supplies to be used by the company. You may also include services performed, or agreements to contribute cash or property in the future.
It is essential that you maintain a record of all contributions, cash or otherwise, made by each LLC member. Create a capital account for each member, which will list all the assets of the business, and how much each member contributed. Record your contribution of 51 percent of the capital.
If other members add to their capital contributions, you will have to contribute more to maintain your percentage. For example, if you initially contributed $510, and the other member contributed $490, you will have contributed 51 percent. However, if the other member then contributes another $490, you also must contribute another $510 to maintain the percentage.
Although operating agreements are not required by law in most states, you should draft an agreement to clarify ownership percentages, allocation of profit and loss, members' rights and responsibilities, and any other rules for the LLC that the members agree upon. In the operating agreement, set limitations that require you to maintain majority control of the company at all times. This may refer to the capital contributed, your right to have a majority vote in any decisions for the company, and the portion of the profits that you will receive in proportion to the other owners.
The IRS does not recognize LLCs as a legal entity for tax purposes, and instead treats them as sole proprietorships, partnerships or corporations. LLCs that are treated like partnerships by the IRS must be careful to follow the regulations concerning partnership allocations. If these are not followed, the IRS may redetermine how the company distributed its profits. Partnerships are required to maintain capital accounts for each member. When the company is dissolved, the assets must be distributed in accordance with the balance on the capital account, which is why it is essential to make adjustments to your contribution as necessary.
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