How much of that LLC do you own, and why does it matter? How do you determine the ownership percentage interest in an LLC?
Why does LLC Ownership Percentage matter?
Your LLC ownership percentage gives you power over the LLC and its profits. Either in deciding about important decisions via voting or getting a piece of the profit pie. You are an owner of the LLC. Depending on the percentage or share of your ownership, you may be a minority or majority owner. Being an LLC member gives you the right to ask for access to books and records and sue the other member for damages caused to the LLC.
How do you find out your LLC Ownership Percentage?
Check the Operating Agreement
In a perfect world, you would have an operating agreement that clearly sets forth your LLC ownership percentage. Ownership percentages are typically in an attachment to the main agreement, but it does not matter; it could also be in the main agreement. It does not have to be expressed in percentage either; it could be called something else, like “units.”
Many small businesses do not have an operating agreement (this is a sad fact, and you should not own part of an LLC without a proper operating agreement). So how do you determine ownership percentage then?
Is there any other Agreement about LLC Ownership Percentage?
Even if there is no formal operating agreement, some other understanding could be reasonably interpreted as an agreement about ownership percentage. For example, an email between the members clearly states that A owns x% and B owns y%. Or a K1 partnership return that was already filed indicating the ownership percentages of the owners. Or a liquor license application that lists you as a member with a certain percentage. Maybe there was a clear understanding between the parties that was not written down. All of the above could potentially be the basis for LLC ownership.
Technically, New York does not allow oral operating agreements (Section 102(u) of the New York Limited Liability Company Law). So any oral understanding regarding ownership percentages could be seen as an oral operating agreement. But there is some support in New York courts that may allow you to get away with it if you have no other way of showing what you firmly believe was agreed between you and the other members.
Be aware, sometimes other understandings or agreements can trump the Operating Agreement
Let’s say an operating agreement provides that X is the sole owner. The operating agreement also states that a new member can only come on board after signing the operating agreement or another condition. Now, you were given 10% of that LLC by the sole owner stating so in emails or other documents. The sole owner claims that you are not an owner because the operating agreement doesn’t list you as an owner, and the formalities in that agreement weren’t followed. In that situation, courts have said that by giving you 10%, X waived the operating agreement requirements.
If there is no Operating Agreement or other understanding, check the LLC Law
If there is really nothing else, you are left with what the law says. Under New York LLC Law Section 503, profits and losses are to be allocated based on the contributions of each member. Contributions can be monetary or in the form of services or property. So if you worked day and night for the LLC and contributed a piece of property and the other members did nothing, you would probably own a larger percentage ownership interest compared to those members. You would also be entitled to a larger share of any distributions to members, Section 504.
This concept is also applied to voting and who has a majority. Section 102(o) says that a majority means the members whose share of the profits is more than half of all shares of all members.
Are you just an Assignee and not a full member of the LLC?
There is another wrinkle that I would investigate when trying to determine whether my client is an owner of an LLC and how much of an owner. The way the LLC law works, it is possible that a membership interest was transferred to you, and you did not become a full-fledged member but just an assignee of all the economic rights (Section 604 LLC law). That means you have all economic rights attached to the LLC interest but no right to vote or participate in management. In that case, you would also not have the right to ask for the books and records of the LLC or sue the other business owner derivatively on behalf of the LLC.
Call if you have any questions about this topic 212 253-1027.