Ownership percentages, as it relates to capital accounts, is most commonly a concern for the multi-member LLC business or partnership model. A single-member LLC has a sole ownership and controls 100 percent of the funds in the capital account. In a multi-member or partnership model, each member contributes and owns a specific percentage of the LLC, along with a reflected percentage of the capital account.
How Operating Agreements Work
Operating agreements between partnerships and multi-member LLCs are tight legal documents that outline the responsibilities and control of ownership, based on contributions. Typically, contributions are monetary; however, an operating agreement can also split ownership, based on other factors. One methodology involves ownership divisions based on predetermined criteria. One party may operate the company, while another finances the account, but both parties have equal interests in the capital account.
Capital Contributions and Ownership
Capital contributions have an effect on ownership. If three individuals launch a multi-member LLC and each member initially puts $1,000 into the account, then they split ownership at 33 percent each. Assume that the business runs for a year, and at the end of their first year, the account has $10,000 dollars. That places the account at $7,000 dollars in value, because it only accounts for the initial growth, until the account is settled. When settled, the account recognizes appreciation, deprecation and all accounting factors into the total value.
In the above scenario, ownership percentage is a simple one-third of the capital account, as the three individuals involved are the original owners. The one-third figure accounts for profits, as well as losses, in the capital account. What happens when the company wants to add a fourth member? If the new owner will assume an equal share, that means each individual will own one-quarter or 25 percent of the capital account. The new owner, however, will pay $2,500 dollars, to assume 25 percent ownership. The value of the capital account is $10,000 dollars, and the new owner will pay 25 percent of the full value, to enter the new partnership agreement.
Capital Account Payouts
Payouts are effected by a number of factors. If the four individuals settled the capital account, they will take the contribution for each member, plus that member's share of profits. Then, the share of losses is subtracted from that total, along with distributions paid out during the life of ownership.
Zach Lazzari is a Montana based freelance outdoor writer and photographer. You can follow his work at bustedoarlock.com.