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How to determine LLC Ownership Percentage

How much of that LLC do you own, and why does it matter? In other words, 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.

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.  This would usually be 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 stating that A owns x% and B owns x%.  Or a K1 partnership return that was already filed indicating the ownership percentages of the owners.  Maybe there was a clear understanding between the parties that was not written down.  All of the above could be the basis for LLC ownership percentage.

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.

If 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.  The same is true for 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.

Call if you have any questions about this topic 212 253-1027.

 

 

About Imke Ratschko


Imke Ratschko is a New York Attorney helping small businesses, business owners and entrepreneurs with all things "Small Business Law," such as litigation, contracts, business owner disputes, shareholder and operating agreements, sale or purchase of a business, investors, and starting a business. You can reach her at 212.253.1027 or by email.