Can an LLC have Members with a Non-ownership Economic Interest?

Today I answered a LinkedIn question about forming an LLC where some members have no ownership of the LLC but receive a share of cash resulting from the business’s profits (their economic interest). The question and answer are reproduced, in somewhat edited form, below. (Since I first wrote this post, LinkedIn has shut down its Q&A feature, so you no longer can find this question there.)

Q: Can you have a Manager Managed LLC where Members have zero ownership interest but receive a share of economic interest? So, the Operating agreement would look like this: 2 Manager Members w/ 50/50% ownership share and 25/25% economic share; 2 Additional Members w/ 0% ownership share and 25/25% economic share.

A: The short answer is “yes”, though, as explained below, I will need to change your terminology slightly.

I recently created, for a client, an LLC that has not only the variables that you identified, but more.

The word that I would change / remove from your question is “ownership”, because it is too imprecise. You are talking about various types of membership interests potentially having differences with respect to:

• Allocation of capital contributions, profits and losses
• Distribution of cash
• Voting rights

I found it easiest (in my client’s Operating Agreement) to characterize the five different types of membership interests (expressed as numbers of Units held by a member) referred to as five Classes (A through E). One of the exhibits to the OA is a table that sets forth, for each Class, its attributes with respect to each of the variables set forth above.

This definitely is not a do-it-yourself project. You should retain an experienced business lawyer to help you, and you probably should consult with your accountant / tax advisor, too.

Check out the many other posts about LLCs.

Photo credit: Michal Koralewski via stock.xchng

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.