How to Change ownership percentage in an LLC

Question

My oldest son recently opened an LLC in order to start investing. He hasn't done any business with the LLC as of yet. He is wanting me to help him with his business and give me a percentage of his business now after the fact that he's opened it. Of course, I originally told him that I could help coach him and it would be his business 💯%, but he feels better if I own a portion of it and would be a little more active with helping him getting it up and running…
Would it be simpler just to open a new LLC and close down the first one? He hasn’t even opened up a checking account yet.

Stephen Nelson · Answer

I don't see this point listed above, but if LLC goes from being a single member LLC to a multiple member LLC, you'll go from having a disregarded entity to a partnership.

That greatly complicates the tax return. A disregarded entity just has its income and deductions reported on Schedule E inside the member's 1040.

A partnership return requires for all practical purposes a real accounting system that generates financial statements and a competent tax accountant.

Note: Not 100% sure this is right, but I think Intuit (which I consider the Costco or Walmart of entity tax return prep) seems to charge $1700-ish for a basic 1065?

Henry Clark · Answer

I wouldn’t do it.

1.  At some point he will want to or should want it just to be him.  He should want to keep the same LLC so he has the history behind it.

2.  If he goes to either dissolve the LLC or buy you out it could create some cash issues for him.

3.  If you’re not really good at writing the LLC operating agreement you could get sucked into a bad situation.

4.  To me it is better for him to do a consulting agreement with you.  If he wants you to share.  Taxes will be higher for you but less risk.

If you move forward with the LLC then reduce exposure.  Build these into the Operating agreement.

A.   How to value and you sell out.

B.  Loans and bank accounts require dual approval to add and for transactions.

C. Credit card and account limits are small enough to trigger early payment.  D.  Would do term insurance on both of you for 5 years.   The other is the beneficiary or the LLC.

Michael Plaks · Answer

Thumbs up to Henry. Very rarely does someone bring common sense into these discussions.

But I agree 100%. Partnerships, and particularly inter-family partnerships sound like a great and simple idea. At first. Then life happens, and you have a very tense Thanksgiving table.

I would also recommend consulting over partnering.

Stuart Udis · Answer

Chris is correct, amended and restated operating agreement is all that's needed. Also, if your son requires your signature to co-guarantee loans on his first purchases,  the lender would most likely want you to be a member of the LLC as well.

Natalie Kolodij · Answer

This also hasn't come up - Are they your dependent/a minor?

Ben Fernandez · Answer

You all can amend or apply for a new FEIN being that your son would be going from a single member LLC to a multi member LLC. I think the new FEIN will be needed. State docs need amended as well. You'd also update or create an operating agreement to specify the ownership percentages and roles of the LLC.

Another process would be to leave his LLC as is, create a new LLC for yourself, and then create a joint venture LLC where his LLC and your LLC are the members. You would also establish an operating agreement for this JV LLC to indicate the roles, responsibilities and ownership percentages.

Mitchell Zoll · Answer

Please talk with a lawyer about setting this up correctly, whether you use his existing LLC or create a new one. There are a bunch of issues that you need to address now with your Company Agreement - even MORE so because you are family - Not less.

As for how to do it if you are going to use his LLC. Think of it like he owns 100  out of 100 "shares" of Dell stock. You want to now own 10 "shares" and he owns 90.  How do those shares get to you? What paperwork do you show the IRS or bank or other members in the future to show who owns what, and when that ownership started?

It's the same for his company.  Membership Interest (LLC) = stock (Corp). His LLC = Dell.  It's not different because you are family. It's not different because he hasn't done much with it (although the price of the interests you get will be near zero!)

Amending the Company Agreement is part of the process because it documents who owns what inside the company. But that's the end of the process.

Henry Clark · Answer

Point C.  Set your limits at say $5,000 versus $20,000.   That way nothing gets out of hand and you both know what is going on since it takes two of you to pay.   You might have to pay them down 2 or 3 times a month which is a headache, but controls your spending better.

Chris Seveney · Answer

It is very simple - you should have an operating agreement in the LLC and you can amend it, if it has been shared in the past then you would do an amendment signed by him noting your percentage. If you do not have one then you can have one created that shows ownership perentages and you both sign it. Not legal advice and always should consult an attorney

How to Change ownership percentage in an LLC

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