The Complete Guide to Financial Rights to the Assets of a Business |

Knowing financial rights to a business’s assets is critically important for anyone who owns, manages, invests in, or co-owns a company. Business assets can account for a significant percentage of the business’s value, even though owning a company does not mean you own each property owned by the corporation.

This delineation is particularly relevant when partners do not see eye to eye, an owner exits the company, a company is sold, shareholders desire distributions, or when a company liquidates. Does this mean I have a bit of the company property? Is My Partner Allowed To Sell An Asset Without Me? Better known as “What happens to business assets if the company quits?” this question often arises during these situations.

The answer is typically specific to the business’s ownership structure, ownership agreements between the parties related to the ownership and use of certain assets, and other factors such as applicable state and federal law.

For instance, a shareholder of a corporation owns shares in the broader corporation rather than owning specific percentages of its equipment, real estate, bank accounts, or intellectual property. Likewise, a member of an LLC typically owns a membership interest in the LLC rather than directly owning a proportional slice of every entity asset.

This guide describes financial claims to business assets, how ownership changes based on the structure of a business, what happens when businesses are sold or go through disputes (such as bankruptcy), and how business owners can put better protections in place.

Table of Contents

What Are Financial Rights to a Business Owner’s Assets?

What Are Financial Rights to Business Assets?

The rights may include the right to profit from business assets, interfere in decisions relating to major property, distribution of income from the company (including distributions of profits), transfer an ownership interest, or receive a portion of any residual value if the company is dissolved.

But these rights should not be mistaken for outright ownership of individual assets.

Let’s say that two people have 50% ownership in an LLC that owns a $1,000,000 office building. We might assume everyone has $500,000 worth of the building. But legally, the building is usually owned by an LLC. There is no single owner owning shares or a piece of the LLC.

That designation influences who can sell the building, use it, whether creditors can levy against it, and what happens if one of the members wants out.

As such, one of the key ideas in this area is to understand the difference between ownership of the business and ownership of business property.

Definition of a Business Asset

A business asset is an economic resource owned or controlled by a business and expected to contribute to the company’s operations.

Certain identifiers in the assets are easy to tell. This includes real estate, manufacturing equipment, office furniture, inventory, vehicles, computers, and cash.

And while some assets are very visible, others will be less so, but ultimately every bit as valuable. Intangible assets like trademarks, copyrights, patents, proprietary software, trade secrets, customer databases, contractual rights, and valuable brand recognition can be an important component of a company’s overall value.

Businesses may also possess financial assets such as investment accounts, accounts receivable, securities, deposits and reserves.

How financial rights apply to those assets, again, depends on who legally owns them. An asset belongs to the company, and individual owners could not hit the ownership interest baton as personal property.

Business Ownership Is Not Asset Ownership

This is where plenty of business owners get confused.

However, you might own 20% or 50% or even 90% of a company, and that does not mean that you personally own plus/ minus that % in every asset held by the business.

An LLC or corporation typically owns its property, not you, the owner of that entity. The owners have an ownership interest in the entity.

For instance, suppose a corporation has $500,000 in equipment, $200,000 in cash, and valuable intellectual property. An ordinary shareholder who holds 25% of the corporation cannot demand their share (i.e., a proportionate piece) as machinery, or come in any day and take 25% of the company’s cash.

In fact, the shareholder owns 25% of the shares, but only as permitted by that corporation’s bylaws or other governing documents and applicable law. Those shares may be worth as much as the underlying assets of the company — but it is not the same thing as owning those assets directly.

One reason business organizations can run independently of owners and shareholders selling their interest, or even leaving, is this separation.

How Your Business Form Affects Financial Claims to Assets

The legal form of a company plays a significant role in determining who controls property and what financial rights owners have.

A sole proprietorship works differently than a partnership, and both are different from an LLC or incorporation.

It is important to grasp these distinctions before entering any ownership pact.

Financial Rights in a Sole Proprietorship

A sole proprietorship is normally the easiest type of business structure.

Unlike with a corporation or LLC, there usually is no separate legal entity between the business and the owner. For this reason, the lines between business assets and personal ownership often become blurrier.

For instance, if a sole proprietor acquires equipment intended for business use, the individual typically owns that piece of equipment. Typically, the property remaining following the settlement of debts and other obligations goes to the owner if a business closes.

On the downside, this lack of separation can also make the owner’s personal assets open to specific business debts.

That is why many companies, over time and with increased operations or higher financial risk, eventually consider establishing an independent legal entity.

Financial Rights in a Partnership

A partnership is when two or more people carry on a business together.

Generally, the partnership agreement and relevant partnership law govern the financial rights of partners.

One critical principle is that partnership property = property of the partnership (as opposed to the personal property of partners).

Let’s say two partners purchase commercial equipment by utilizing funds from the partnership. Thus, a partner cannot merely take half of the equipment home as their own—even if they each own an equal percentage of the partnership.

The equipment, on the other hand, is owned by the partnership and should be used as needed in accordance with what the partners have agreed.

Due to the structure of a partnership, financial rights are more oriented toward distributions of profits, capital accounts, ownership interests, and entitlement to residual value in the event of dissolution.

An appropriately written partnership agreement can specify these rights and minimize potential disputes in the future.

Financial Rights in a Private Limited Company

An LLC creates more separation between the business entity and members.

An LLC will, in most cases, own property itself. The LLC has members, and a member owns membership interests.

Where the assets of an LLC usually will be: real estate, vehicles, equipment, bank accounts or intellectual property will belong to the company.

The operating agreement and relevant LLC law typically govern a member’s financial rights.

The operating agreement can lay out the distribution of profits, when and how distributions are made, what percentage ownership is calculated at, who controls key decisions in the operation, and what happens if a member leaves.

Let’s say you have a two-member LLC and each individual owns 50%.

While both members may have equal economic rights, this does not mean either member can sell property and withdraw money from accounts without the other member agreeing. The extent of their authority relies on how the LLC is managed, along with what the operating agreement specifies.

Operating agreements are especially important in multi-member LLCs.

Financial Rights in a Corporation

Corporations establish a clear legal barrier between owners (called shareholders) and the company.

The corporation owns its assets. They own shares that measure their stake in the corporation.

Financial rights of shareholders include those prescribed in any conditions, receiving dividends if and when declared correct, and the sale of shares subject to applicable terms and restrictions. Before dissolution, if the corporation is dissolved, there may be a proportional payment of remaining value after liabilities are settled.

What shareholders do not typically have is the personal right to say about or take corporate property.

Not even a shareholder with a basic ownership stake of a corporation can usually convert corporate funds or equipment into personal property.

This distinction protects the integrity of a corporate structure.

Financial Rights Based on Ownership Percentage

It’s what ownership percentage you have, but that’s only part of it.

In the case of a company, an owner of 50% might be entitled to significant profit, distribution, voting and/or business value rights. But those rights will depend on the corporate structure and governing documents of the company.

Certain businesses have varying ownership classes that each offer differing financial rights. Perhaps one shareholder orders with higher voting rights, and another has special rights over distributions.

In an LLC, members can distribute profits according to a method other than what might be consistent with their ownership percentages because the operating agreement will govern distributions, and if there are no applicable rules under state law.

For that reason, simply knowing what percentage of ownership someone has is not enough to identify all their financial rights.

The company’s governing documents also need to be checked.

The Effect of Operating Agreements and Shareholder Agreements on Asset Rights

These written agreements are one of the most significant documents used to determine financial rights.

An LLC usually explains how money, property, profits, and ownership changes will be handled in the operating agreement.

In the case of a corporation, similar provisions may be contained in corporate bylaws (or may be included in a shareholder agreement or other corporate documents).

They can also answer fundamental questions before any disagreements take place.

They could, for example, describe whether a member (or all of them) are required to agree on the sale of major business assets, what will happen in the event an owner has interest in leaving, how ownership interests should be valued, even if the company or other owners can buy out an exiting owner’s interest.

It makes it more challenging and costly to resolve disputes because the parties often start with default state law if they have no clear agreements in place.

Are Owner Interests in Capital Contributions Rights to Specific Assets?

Not necessarily.

An owner contribution is when an owner puts up cash, property, or some other asset of value into the business.

An example would be one partner putting in $100,000 cash and another (existing company) putting in equipment valued at $100,000.

Properly contributed property may be an asset of the company depending on how the transaction is structured.

It is important to understand that just because an individual owner supplied an asset, the contributing owner does not automatically retain personal ownership rights therein.

Instead, the contribution can always be used to increase the owner’s capital account or ownership interest.

It becomes even more critical if the issues arise when one owner later departs the business and seeks a return of property provided to start it.

How that circumstance should be dealt with is normally decided by the governing documents and records of the contribution.

If the Owner of That Business Used Company Assets for Their Own Use

The use of business assets for personal reasons can raise legal, accounting, and tax issues.

Just because the owner controls the company, business assets are not free to utilize as personal property.

For instance, an LLC member who regularly pays unrelated personal expenses out of company funds without proper documentation is likely to cause accounting difficulties and undermine the separation of personal from company finances.

Likewise, a shareholder who considers corporate property to be personal property may bring about governance issues.

Accounting records remain intact if business and personal assets are separated, thus preserving the legal distinction between the company and its owners.

If the company assets are used for personal purposes, then that transaction should be properly documented and, in many cases, managed in accordance with applicable tax and accounting laws.

You Can Still Work on Your Business Assets if One Owner Leaves

Typically, the departing member’s rights are about receiving value for their ownership stake as opposed to receiving title interest in company assets.

Let’s say, for example 2 guys own an LLC equally, but one wants to buy the other out.

A departing member cannot just claim half the equipment, half the company cash, and half its intellectual property.

Rather, the parties may agree to buy the leaving member’s ownership interest.

One possible factor is the value of that interest calculated in part based on relevant details like whether your company has assets, liabilities, earnings, and prospects.

Assuming there is a buy-sell agreement, that too may outline the process of price determination and transition.

Another reason business valuation comes into play is an ownership change.

What Are Financial Rights in a Business Sale?

The form of the sale often is a critical component in determining how business assets are treated when a company sells.

In general, there are two generic forms: asset sale and ownership-interest sale.

Asset Sale

With an asset sale, the buyer acquires particular assets of the company.

For example, the buyer buys any equipment, inventory, intellectual property, customer contracts, and other operating assets.

The selling company receives proceeds from the sale. The funds are then subject to company liabilities, taxes, and debt obligations, as well as regulations regarding distribution.

Just because they own the company does not mean that individual owners directly receive the purchase price at closing.

Ownership-Interest Sale

Ownership-interest sales can involve the buyer buying shares of a corporation or membership interests in an LLC.

The assets remain owned by the company.

Who ultimately owns the company is what changes.

Such distinctions can be critical for taxes, liabilities, contracts, and other financial rights — which is why buyers and sellers tend to immerse themselves in where the transaction will fall on this spectrum.

What Happens to Business Assets During Dissolution?

Dissolution: This is when you formally close down a business.

Usually, any remaining assets of a company have to be distributed between owners in an orderly manner when it is dissolved.

The firm needs to pay outstanding commitments first.

This can involve payment to creditors, settlement of taxes, satisfaction of contractual obligations, salary/wages where mandated, and the fulfillment of any other liabilities relating to closing down an enterprise.

The remaining value may then typically be distributed to owners in accordance with their respective legal and contractual rights, only after these liabilities have been addressed.

You may have an LLC that has $300,000 in assets and $200,000 outstanding in debts.

The members do not have $300,000 available to distribute. Usually, your company’s obligations have to be satisfied first before the remaining value can be shared out.

Consequently, the economic value that is available to owners may be far less than the gross value of a company’s assets.

What Happens When Partners Disagree Over Property?

This can lead to some of the most serious disputes between business owners, known as asset disputes.

One partner might want to sell an asset — the other wants to hang on to it. One owner could feel money from the company is being improperly spent. Another fight could be over whether property or equipment in the business really belongs to the business or is personal properties/owned by one of the owners.

Typically, this will start with an examination of the company bylaws and other corporate founding documents, as well as financial documentation surrounding profits.

This can include a provision in the operating agreement that requires both owners to approve of any major asset sale. For example, a partnership agreement might outline rules for property. Corporate bylaws may delegate certain powers to directors or officers.

If the documents do not settle the situation, negotiation could come into play.

In such situations, mediation or arbitration can be a less disruptive process than litigation.

This is especially the case where disputes involve big sums of money as well as allegations of mis-dissipation, fraud, or breach of fiduciary duty, in which case legal proceedings may be necessary.

Much of the response is contingent on the level of authority granted to that partner and what the company’s organizational documents say.

Some businesses have managers or officers who are entrusted with authority to sell assets in the normal course of business.

For instance, a retail business does not need the approval of all shareholders every time it sells inventory because selling inventory is part of its normal course of business.

It’s one thing to sell a substantial asset.

Depending on the structure of the business and its governing documents, other owners/managers/directors/shareholders may require approval for a transaction related to real estate, significant equipment, intellectual property, or material assets.

So the percentage of ownership alone does not answer whether or not that one owner has permission to sell an asset of the business.

We should also look at who has decision-making authority.

You Can Still Work on Your Business Assets if One Owner Leaves

Typically, the departing member’s rights are about receiving value for their ownership stake as opposed to receiving title interest in company assets.

Let’s say, for example 2 guys own an LLC equally, but one wants to buy the other out.

A departing member simply cannot just claim half the equipment, half the company cash, and half its intellectual property.