Tokenizing Ownership: Transforming LLC Equity with Blockchain
There are any number of reasons to start an LLC, from tax flexibility to personal liability protections. An underrated benefit of the LLC structure is the leeway you have to determine how you’d like to divide business management responsibilities. And, as you determine which partners have what level of say in day-to-day operations, you can also allocate profit shares however you wish.
This flexibility is great, but it does introduce its own set of questions. For example, what’s the best way of verifying that all LLC partners receive their proper equity shares? One option is to take advantage of blockchain technology, which can function as a kind of digital ledger for your LLC.
If you’ve heard of blockchain before, it’s probably been in the contest of cryptocurrency. Blockchain has been deeply significant to cryptocurrency, providing a record of transactions that is both decentralized and secure.
However, blockchain has applications far beyond crypto. It basically allows you to make the data within any industry or business setting immutable, which is just another way of saying inalterable.
Since there is no way to change the data contained in a particular block, there is only one point at which trust is required… and that’s the initial point of data entry. As such, there is only the most minimal need for third-party appraisals to audit the information contained in a ledger. Secure procedures are needed to input the data, and that’s it.
Blockchain comes with scripts, programs that carry out the tasks you would have to conduct manually in a typical spreadsheet. These tasks include saving and storing the data in question. It’s also important to note that blockchain is distributed, which means the information is saved in multiple locations. Each set of data must match in order to be considered valid.
When the blockchain collects information about a specific transaction, that information is saved in a block. (Think of this as something akin to the cell in a Google Sheet.) When the block is full, it is encrypted, then assigned a unique hexadecimal number. This number is known as the hash.
The hash is ultimately entered into the header of the following block, thereby creating a series of blocks that are linked (or chained) together.
Again, it’s important to keep in mind that an LLC may have any number of members. In the LLC’s Operating Agreement (which is basically its constitution), the members can dictate how profits are shared between them. If there are two members, this may be an even 50-50 split. But if one member handles more of the day-to-day affairs, or invests more startup capital, the division of profits may be 60-40, 80-20, and so forth.
It’s critical to keep track of equity allocations evenly, with a clear record of the profits and losses claimed by each member. For one thing, members must declare their profit and loss shares on their personal tax returns, where they are taxed at their normal rate.
Blockchain provides a seamless and secure way to keep track of these equity divisions, and of any transactions that take place between members. Blockchain offers a number of distinct benefits, including:
While these benefits are noteworthy, there are also some potential drawbacks for LLC members to be aware of. These downsides include:
Amanda E. Clark is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about content and social media marketing. She has also written widely about different aspects of small business ownership.
