Whenever anyone plans to commence a business, the first thing that pops up in his mind is the type of business structure he will have. Well, there might be different business structures out there but the most famous one among entrepreneurs is surely Limited Liability Company or LLC.
If you will look at the number of business structures then you will realize that the number of LLC is much more than any other business structure and there is a proper reason behind it. From offering a high level of flexibility to giving protection to the members, there are many advantages offered by LLC.
But if you are going to form an LLC then there are a few aspects of this business structure that you must keep in mind and in this blog post, we are going to talk about one very important aspect of LLC formation and that is LLC ownership percentage.
Why does LLC ownership percentage matter so much?
If you are planning to incorporate LLC in NY then you must understand the importance of LLC ownership percentage as without this, you can never manage your LLC properly. The LLC ownership percentage gives you complete power over the LLC and the profit made by it.
It doesn’t matter whether it is about voting rights for a particular decision or sharing the profit earned by the LLC, the LLC ownership percentage matters a lot. Without the knowledge about the LLC ownership percentage, everything will go haywire.
How to find your LLC ownership percentage?
Go through the operating agreement
If you planned well before making the decision to incorporate LLC in NY then you must have an operating agreement and you can always refer to the operating agreement to know about the LLC ownership percentage. This usually comes in the form of an attachment to the main agreement but this is not necessary as it can also be a part of the main document.
Another thing to keep in mind is the LLC ownership percentage doesn’t always need to be mentioned in percentage form as in many cases, the ownership percentage is mentioned in units as well. So, don’t get confused if the LLC ownership percentage has been mentioned in any other form.
There are many small businesses that don’t even have any type of operating agreement and this is the worst thing a business can do. You should never even own an LLC if you don’t have any type of operating agreement because without an operating agreement, how can you determine the ownership percentage.
Is LLC ownership percentage mentioned anywhere else?
If you don’t have an operating agreement then you have to start looking at other options. Some other types of understanding could be interpreted as an agreement when it comes to ownership percentage.
For example, if you have an email that states person A owns X% of the company and person B owns Y% of the company then this email can be used for an ownership percentage. But this email should have been shared between both person A and person B and there should be some sort of confirmation from both parties.
In addition to this, you can also use the K1 partnership return that has been already filed and it should clearly indicate the ownership percentage of the members. But all this should be referred to only if you don’t have an operating agreement.
It is always a good idea to work on an operating agreement whenever you decide to incorporate LLC in NY.
You can also check the LLC law
If you are left with no other option then you have to work according to the LLC law and while doing so, you have to refer to New York LLC Law Section 503. According to this law, the profit should be allotted according to the contribution of every member. And when we say contribution, we mean both monetary and in the form of property or service.
This means that if you have worked a lot for the LLC, contributed money, and have contributed property as well then according to the law, you deserve a bigger percentage of the profit. There is nothing complicated about the LLC law and its policy when it comes to ownership percentage but again, it should be referred to only when you don’t have an operating agreement.
As you can see, you might have many options to know about the ownership percentage but at the same time, you should make sure that you have an operating agreement as with this, you don’t have to deal with any type of disagreement among the members regarding the LLC ownership percentage.
So, always give importance to an operating agreement before forming an LLC and avoid any type of issue regarding profit distribution responsibility and authority.