How to divide equity in an LLC?
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How to divide equity in an LLC?
Myself and my 2 partners have an invention. Before we patent it we need to make a company own the patent correct? So I filed for an LLC in the state of michigan but on the LLC we didn’t have to write the owners of the business just someone to represent it. Me and my partners agreed on equity 30/30/40, so where is that supposed to be written? Where do we write the equity and write our names to ensure that we own the business and the equity is split correctly?
Asked on February 2, 2018 under Business Law, Michigan
SJZ, Member, New York Bar / FreeAdvice Contributing Attorney
Answered 3 years ago | Contributor
The equity split and any/all rules governing the company are recorded in an "operating agreement": the operating agreement states who owns how much, how decisions are made (generally by majority ownership, but any other way you all agree to is legal), how profits and losses are divided (again, generally by percentage ownership, but its legal to allocate more or less to different members--"member" is what you call an owner of an LLC), what happens if someone wants out (must the other members buy him out? if so, at what price?), etc. A business lawyer can draw up an operating agreement for you which will set forth how the LLC is owned and run and answer any questions (such as about potential future buy-outs) which should be answered. Most states do not require the operating agreement to be filed, though some do: the attorney will know what your state needs. So retain a lawyer to help you structure and set up the LLC.
(By the way: sometimes you do want to change profit and loss from the usual straight percentage basis. For example: I had a three-person publishing LLC. I worked full time and put some money in; a second owner was important, but only worked part-time and put in no money; the third was a passive investor who put in most funding. Profit was allocated by ownership percentage, but in the operating agreement, we set it up that the investor could get the majority of any losses, since he both could take the most effect of them [how much tax loss you can take is generally linked to your capital investment] and it was fair for him to get the tax benefit in the early years, before we started running a profit.)
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