How Equity Works in an LLC

Joining or creating a multimember LLC is an alternative method that grants you the personal asset protection of a corporation, but allows more flexibility than aligning with a corporation would. An LLC can also be viewed as another form of partnership. Further, there can be an unlimited number of co-owners in an LLC.

 

How Does Equity Work in an LLC?

 

An LLC is created by filing articles of organization with your state’s secretary of state. Then, designating two or more owners, called members. The distribution of equity is not determined by certificates but are defined in the LLC’s operating agreement. In this agreement, it is called membership interest. Furthermore, a membership interest is the ownership interest or equity in your LLC. This means that if you have 2 members of the LLC that have equal ownership, then each of you would have membership interest equal to 50% interest. Indeed, the percentage of equity split can be determined within the operating agreement. This gives the members freedom over who gets how much.

 

What Does It Mean to Have This Interest?

 

As a member, you can have either capital interest or profit interest. Profit interest gives you an interest in solely profits. Capital interest gives you interest in both the equity and the profit of the LLC. Thus, your share is proportional to your interest. If you have 25 % capital interest, this means if the LLC is sold you get 25%. You also get 25% of the profits and 25% of liquidation if the LLC ceases operations.

 

The Operating Agreement Is Essential

 

An LLC gives its members a lot of flexibility as to how the LLC is governed and how to manage its equity and interests. The operating agreement is the “law” of the LLC. In fact, it defines and clarifies how much interest goes to each member, the rights of the members, as well as any responsibilities. An LLC relies heavily on its operating agreement to function properly and be successful.

 

Learn More About Equity in an LLC

 

For more information on LLC and its operations, contact us. Also, check out our blog for more informative articles.