As a business owner, you may seek the protection of a corporation but dislike its administrative requirements. Similar to a corporation, a limited liability company shields your personal assets from obligations and liabilities created by your business activities while providing the administrative flexibility of a partnership. You can have an unlimited number of co-owners and investors in an LLC. The way you divide equity in an LLC depends on the members and agreements.
You can form a multimember LLC by filing articles of organization with the secretary of state in your state and designating two or more owners, called members. Typically, with this initial filing you must provide the names and addresses of the members. Some states require you to designate how you will manage your LLC in its articles. Your LLC can be member-managed which means you and the other members directly manage it. Your LLC can also be manager-managed by professional managers or managed by a hybrid of the two, a formal member-chosen board.
The ownership interest or equity in your LLC is called membership interest. You do not have certificates that record your membership interest. Instead, you define the percentage each member owns and what distribution rights that translates into in your LLC's operating agreement. For example, if you have four members who all have equal ownership in the LLC, then you would each have membership interest equal to 25 percent ownership. As a member of an LLC, you cannot freely transfer your ownership interest.
As a member in an LLC, you can have capital interests or profit interests. A capital interest gives you an interest in both the equity and the profits of the LLC. This is the standard for most LLCs with one class of membership. As a member, you receive your proportionate share of the equity and profits. This means, if you have a 25 percent interest, you receive 25 percent of the profit distributions, 25 percent of the equity if the LLC is sold or 25 percent of the liquidation proceeds if your LLC ceases operations.
You can have multiple classes of equity in your LLC. For example, in your real estate LLC, you may have a managing member who manages the LLC while all the other members are relatively passive participants. Your LLC grants one class with higher voting rights to the managing member and another class to the other members. Your managing member may only own 25.5 percent of the equity but have 51 percent voting control.
Unlike corporations, there are few statutory requirements that specify how to govern your LLC and how to manage its equity interests and participation. Therefore, an LLC relies heavily upon its operating agreement. You must clearly define how many classes of membership interests exist, what each member receives and any rights and responsibilities. An operating agreement clarifies ownership rights and prevents confusion that could cause serious tension between you and other members.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.