How to Change LLC Ownership Percentage

As seasoned financial advisors, we deal with LLC ownership changes all the time, and we know that trying to make sense of the process, with all the necessary paperwork, new tax forms, and the LLC’s members’ demands can be a struggle.

Yet, at times, altering the LLC ownership percentages becomes a necessary business decision. This could be due to the introduction of a new member, the exit of an existing one, or even a shift in the capital contributions among the LLC members.

Changing ownership percentages can be indeed complicated, involving precise steps and legalities.

In this article, we will help you navigate through this intricate process, ensuring you make informed decisions tailored to your business needs. So, let’s delve deeper.

Brief Overview

  • LLC ownership percentage changes are complex and necessitate unanimous agreement, amendments to the operating agreement, and adherence to state laws.
  • Ownership percentages within an LLC are typically determined by factors such as the member’s financial contributions, the amount of work they put into the business, or the specific expertise they bring to the table.
  • The reasons for changes include new members, splits, sales, death, and loans.

How to Modify the Ownership Percentage of the LLC?

Changing the ownership percentage of an LLC is a multistep operation. It requires the unanimous agreement of all existing members, an amendment to the operating agreement or the issuing of a new operating agreement, and in some cases, filing a revised form with the state. 

Here are the steps to modify the ownership percentage:

1. Check the Company’s Operating Agreement 

The first step we take to alter an LLC’s ownership percentage is to review the company’s operating agreement.

This document is essentially the backbone of an LLC, outlining not just the ownership stakes but also the voting rights, responsibilities, and distribution of profits among the LLC members.

According to this study published in Emerging Markets Finance and Trade, while ownership concentration initially improves a firm’s value, it can lead to risk for firms with growth opportunities as large shareholders may exploit smaller shareholders – hence, the need for drafting a clear LLC operating agreement.

If your business doesn’t have an operating agreement, we strongly recommend you draft one with the assistance of an attorney and tax advisor.

This will not only help you make the necessary alterations when it comes to transferring ownership but also protect your personal liability. 

2. Amend the LLC Operating Agreement 

Once we’ve reviewed the operating agreement, the next step is to make the necessary amendments. The existing members should convene a meeting to discuss and agree on the alterations in the LLC shares.

The responsible party must document the process in the form of a written amendment to the operating agreement and the issuing of new membership certificates.

Remember, any modifications made should accurately reflect the new percentages, ensuring that the total ownership remains 100%. Also, we always make sure all owners sign off on the modifications to avoid any future conflicts or misunderstandings. 

3. Notify the State 

After making the alterations to the LLC’s operating agreement, we inform the state about the modification in the LLC’s ownership percentage. Different states have different rules, so it’s crucial to check each state’s laws.

Some states require the responsible party to file an amendment with the Secretary of State, while others may need them to submit updated annual reports since ownership changes have tax implications.

4. Notify Other Parties 

Finally, we make it a priority to notify customers and other relevant parties about the alterations in the LLC’s ownership structure.

This includes customers, vendors, employees, financial institutions, and any other individuals or organizations that have a professional relationship with the LLC we are representing.

How Are Ownership Percentages Established in an LLC?

Ownership shares in a limited liability company (LLC) determine how profits are divided, how votes are weighted, and how much each member is expected to contribute to the entire business. But how are these percentages established, and why do they matter? 

Ownership in an LLC is determined by the percentage of ownership interest each member holds. However, we often see LLC operating agreements also specifying other factors that determine the ownership percentage, such as the amount of work or time contributed to the business by each member.

In the initial stages of forming an LLC, the business owners must decide on their ownership percentages. These shares are typically determined based on each member’s investment in the company.

For example, if a member contributes 40% of the company’s startup capital, they might be granted a 40% LLC ownership stake.

What are the Main Reasons for Changing Ownership Percentages?

After thorough research, our team has found five reasons why modifications in LLC percentages occur. Let’s delve into each of these scenarios and their implications: 

Adding New Owners 

When a new LLC member is introduced, it may mean redistributing the ownership percentages among the existing members. This can impact the voting power of each member and their share of the profits or losses. 

Splitting the Company 

Company splits occur when one or more members leave to form a separate business entity. In such a scenario, the departing members’ shares need to be reallocated among the remaining members.

This action should be done carefully to maintain balance and fairness within the existing organization. 

Selling Shares 

Selling interests is one of the most common reasons for changing ownership percentages. Here, a member sells part or all of their shares to another existing member or a new party through an agreement.

This can cause a shift in the balance of power and influence within the company. 

Death of an Owner 

The death of an owner often triggers an alteration in ownership percentages. This usually depends on the buy-sell provisions stated in the LLC’s operating agreement or a separate buy-sell agreement.

The deceased member’s interests may transfer to their estate or be distributed among the surviving members. 

Acquiring a Business Loan 

Finally, acquiring a business loan can also lead owners to change ownership percentages.

The business loan may be secured by some or all of the members’ interests in the LLC, and in certain circumstances, a member can sell a portion of their interest to help the LLC raise funds. 

FAQs

Is it possible to divide an LLC into fractions? 

Yes, it is indeed possible to divide an LLC into fractions. This procedure allows the ownership percentages to be split among the LLC’s members, providing more flexibility in distributing profits and losses. It’s a common practice in multi-member business structures.

Can LLC members own different percentages? 

LLC members may have different membership percentages based on their contributions to the company, such as initial investments or ongoing work. It’s important to have a clear understanding of each member’s ownership stake to ensure fair distribution of profits and decision-making power.

Can a partner have 0% ownership?

Yes, a partner can have 0% ownership in a limited liability company if they do not hold any equity or ownership stake in the company. Partnerships can have varying ownership distributions based on agreements, allowing for partners with no ownership interest.

Carla Baker

Carla Baker

With an MBA from the University of Pennsylvania and a proven track record, our Co-Founder brings expert guidance to new small businesses and LLCs. Her portfolio showcases a history of successfully launching and managing diverse ventures, while her passion lies in empowering others to navigate the world of business.