Who are the owners of an LLC? Although, limited liability companies have become an extremely popular form of business entity, many small business owners or people forming a start-up business are still unfamiliar with ownership and structure issues related to an LLC. The article below discusses ownership issues of an LLC, which is a typical question for business owners and those starting up a business. Please remember to consult your business attorney with your specific facts, questions and circumstances.
The varying types of ownership interest in an LLC are very important for a business owner to understand, and can be very useful in the overall structure of business and even the drafting of operational documents such as the operating agreement. The owners of an can be:
- LLC Members with an economic interest (often called a “membership interest”) in the LLC;
- Non-economic members; and
The LLC Act in Colorado does not define “ownership interest” but the act defines “membership interest” as “a member’s share of the profits and losses of a limited liability company and the right to receive distributions of such company’s assets.” When forming the LLC, the members will contribute cash, property or can provide services or a promissory to the note to the company. In Colorado, a person can be a member and receive a membership interest without necessarily making a contribution or being obligated to the LLC in another manner. Under such an arrangement, the member may receive a profits interest in the LLC whereby the member is allocated a share of the profits and losses of the LLC, but does not yet have a capital interest in the LLC. A capital interest would be more defined as an interest in the value of the LLC. In both cases, whether contributing capital or receiving an interest for services or an obligation, the member would hold a “membership interest” in the LLC and have the rights afforded in the act and within the operating agreement of the LLC.
The ability to have non-economic members within an LLC can be very advantageous for the LLC and the members. The LLC Act in Colorado allows a member to be a non-economic member whereby the person is a member of the LLC but does not acquire a membership interest, and may not be obligated to make any contribution to the LLC. The non-economic member may hold all of the rights of other members such as voting rights, but no right to an economic interest in the LLC.
An assignee may be admitted through the sale or transfer of an interest. The assignee may not need to be admitted as a member, and thus although the assignee may receive the right to receive profits and losses from the LLC (the economic portion), the assignee may not have the right to participate in the management of the business, and vote. The operating agreement of the LLC could control many of these issues. Allowing the assignee the economic benefit of the interest but not the management portion of the interest can be very beneficial in a closely held business whereby the original members may not want the wife or other family member of an original member to have an operational or management power, but the assignee can still receive the economic portion of the original member’s interest.