Limited liability companies are one of the most important tools available to business owners to keep their assets safe. Forming an LLC under Pennsylvania law provides protection against creditors and provides clarity of ownership in case an employee or someone else tries to claim that they have some right to ownership of your company.
In Pennsylvania you do not have to list who the owner of an LLC is on the Department of State website. In most cases, the Department of State will not have any information at all, either public or private, about who the owner of the LLC is. Unfortunately, this sometimes brings about disputes between different people who claim to be owners of an LLC. So, who owns an LLC and how can you prove it?
The first and best evidence of ownership of an LLC is what is written in the operating agreement. An operating agreement is signed between the members of an LLC and lays out their ownership interest. In most cases, the ownership interest of an LLC cannot be changed without a unanimous vote of all owners. In rare cases, it can be done with a majority vote and a buyout where the operating agreement has specially provided for that option.
But what happens if you don’t have an operating agreement? What do you do if there is no written documentation at all of who the owners are? This can lead to some very messy situations, including where oral agreements between the alleged owners come into play. Courts will allow testimony to the ownership of an LLC that is oral, even if there is no signed or written document to back it up. Other evidence, such as history of transactions, proof of money invested, evidence regarding the time or effort invested (known as “sweat equity”) and evidence of statements made to third parties are all relevant in determining ownership.
Of course, the best way to prevent a dispute over ownership is to make sure that your operating agreement clearly outlines who the owners are and that you have clear rules laid out in advance on how someone can be purchased out of their ownership interest if there is a conflict. This allows a company to continue as a “going concern” and allows the owners to avoid conflict in advance. If your company doesn’t have this clear documentation, now is as good a time as any to reach out to a business law attorney and get this matter straightened out once and for all.
At Cornerstone Law Firm our attorneys help clients everyday to work out ownership disputes and to try to avoid them in advance, if possible. Our attorneys have litigated multi-million dollar disputes over LLC ownership, and have helped negotiate favorable resolutions out of court as well. If you own an LLC or if you’re part of a group of owners of an LLC, reach out to us to talk about your options in ensuring that your ownership interests are safe for the long term.