A Limited Liability Company (LLC) is a business structure that is popular because it limits its owners’ personal responsibility for their company’s debts and liabilities while also allowing them to avoid the double taxation often associated with corporations. Establishing ownership percentages is a necessary first step in forming a LLC in New York. Speaking with an experienced corporate attorney can help you better understand the significance of determining membership interests and the legal responsibilities associated with being a member of a LLC.
What Does it Mean To Own A Membership Interest In A LLC?
Owners of a LLC are called “members.” Most states, including New York, do not restrict the types of members, so members may include individuals, corporations, other LLCs, and foreign entities. There is no maximum number of members in a LLC in New York.
A membership interest represents a member’s ownership percentage in a LLC. Membership interests are typically defined by percentages. For example, if there are two owners in a LLC and each put up half the capital to form and operate the company, then each owner would have a 50% membership interest in the LLC. Still, a LLC can establish various classes of membership interests, which grants the LLC the flexibility to allocate voting rights and profits in unique ways that do not necessarily correspond to a member’s initial capital investment. In other words, membership interests are not necessarily dependent on the amount of capital contributed by each member.
Why Do LLC Membership Interests Matter?
A person’s or entity’s membership interest in a LLC is pivotal as it dictates each member’s share of profits, losses, and voting rights (i.e. decision-making authority in the LLC), among other terms. These interests play a crucial role in shaping the overall structure and governance of the business.
What Are Key Considerations When Deciding Membership Interests?
When determining membership interests for a LLC, several factors come into play, including:
- Capital Contributions: The money a member invests in the business can be considered in determining membership interest.
- Time and Effort: Contributions of skills, experience, and time commitment – sometimes called ‘sweat equity’ – may influence a member’s interest in the LLC.
- Expected Number of Members: How many people do you anticipate owning a percentage in your business? This may affect how you allocate membership interests.
- Classes of Membership: A LLC may separate “classes” of membership interests, distinguishing the rights and obligations associated with each class. For example, one class of membership interests could contain full financial and voting rights, while another class of membership interests could include financial rights, but no voting rights.
These considerations, among others, can help guide a prudent distribution of membership interests among members of a LLC.
Does My LLC Need a Formal Agreement?
Yes. A New York LLC must have an Operating Agreement. If your LLC does not have an Operating Agreement, the New York Limited Liability Company Law will act as a gap-filler and govern the operation of your LLC. A formal agreement among the members, like an Operating Agreement, is highly advisable when establishing ownership percentages in a LLC. An attorney should be involved in crafting this agreement to ensure it addresses key elements, such as the distribution of profits and losses, decision-making processes, transfer of membership interests (i.e. selling your membership interest in a LLC), procedures for dispute resolution, and dissolution, among other terms. A well-drafted agreement provides clarity, prevents potential conflicts, and can offer members protections against becoming personally liable for the debts of the business.
What Are The Responsibilities of Ownership?
Owning a business comes with legal responsibilities. Members of a LLC must adhere to state regulations, fulfill tax obligations, and uphold their duties as outlined in the Operating Agreement. Understanding and fulfilling these responsibilities is important both for the success of the LLC and to prevent compliance issues for its members.
What Happens When Ownership Percentages Need To Change?
Membership interests in a LLC may need to change for various reasons, such as a member leaving the company or changes in contributions, among other causes. When changes are necessary, members must follow the process outlined in the Operating Agreement, and legal counsel may be required to navigate any complexities associated with these changes.
Conclusion
Determining ownership percentages is the start of establishing a successful and harmonious LLC. To ensure a smooth and legally sound process, it is advised to consult with a qualified business attorney who may guide you based on your specific needs. To learn more about our corporate legal services, reach out to a member of our team.
