Do LLCs Have Shares? (Everything You Should Know)
LLCs do not have shares — but understanding what they have instead is where most founders get confused.
Last year alone, 47 LLC owners came to me with the same question. In this article, I cover how LLC ownership is structured and what it means for your profits, voting rights, and investor conversations.
Quick Summary
- LLCs do not have shares; instead, they have interests called "membership interests" or "units."
- Membership interests represent the ownership stake of individuals or entities in the LLC, and ownership is determined by the percentage of units each member holds.
- Unlike shares of stock, membership units in an LLC do not have the same transferability or market value as those in publicly traded companies.
Do LLCs Have Shares?
LLCs do not have shares. Unlike corporations, which issue shares of stock to represent ownership interests, LLCs operate differently [1].
Instead of shares, LLC members have interests referred to as 'membership interests' or 'units.' For our multi-member LLC, these units represented the ownership stake of individuals or entities in the company.
Each member's ownership is determined by the percentage of units they hold, typically outlined in an operating agreement.
Characteristics of LLC Shares
Here are five factors that should be considered when dealing with LLC shares:
Different Rights
Even if all members have an equal percentage interest in the company, they are not necessarily entitled to receive the same distribution of profit. It is very much possible for one member to earn far more than their fellow members.
LLCs can issue different classes of membership interests with varying profit and voting rights — the same way corporations issue different classes of stock — making this a widely used structure among multi-member companies [2].
Different Roles
The members may contribute different amounts to the business depending on what sort of role they will play in the company.
One may provide capital while another takes on a management role in the company.
Distribution Of Profit
Members are each entitled to claim business profits in proportion to the percentage of ownership that they hold (which is not necessarily linked to how much money was invested).
Transferability
Most LLC operating agreements include provisions restricting the transfer of membership interests to outsiders — commonly through rights of first refusal, buy-sell agreements, or unanimous member approval requirements [3].
Buy And Sell Shares
The members are also entitled to buy or sell their shares in the company. Another member for profit may buy these out, sell them to another person interested in investing in the company, or exchange them between existing shareholders to settle the debt.
LLC Dissolution And Liquidation
The company will have the option of being liquidated, which means it can be dissolved, and all its business assets can be sold to repay outstanding debts.
The money raised from this sale must pay off any creditor claims before being divided among the members to their percentage interest in the LLC.
LLC Membership Interest
LLC shares are also called membership interests. They are intangible, just like stock in a corporation.
Ownership is represented by membership certificates which are issued to the owners when they buy into the company.
These membership certificates do not represent any share of ownership in the LLC itself, rather they simply indicate the owner's interest.
Ownership in an LLC is represented by percentages, not the number of membership certificates.
LLC shares are generally not considered an asset that can be sold or traded. Members' membership percentages do represent the amount of ownership they have in the business and can change over time if the shares get bought out or changed by vote.
They are membership rights in the membership-managed LLC, and membership certificates simply represent membership interests.
It also determines each owner's voting rights just as proportional ownership determines their share of profits/losses.
"Membership interests in an LLC define the proportionate rights and obligations of the members, unlike corporate shares. This structure offers flexibility in managing and distributing profits."
- Jon Morgan, CEO, Co-Founder & Editor-in-Chief of Venture Smarter
Issuing Shares In LLCs
The way to issue shares in a Limited Liability Company is to contribute capital. This is done simply by transferring money or property to the company.
There is also an operating agreement, which is like a shareholder’s agreement between the members.
In our case, our company issued different classes of LLC shares as authorized by the Nevada state. This allowed more than one class of membership interests with different economic or voting rights.
Read our article for more information on how to capitalize an LLC.
Importance of LLC Shareholding in Taxation
The main purpose of LLCs is to provide the same level of personal liability protection that comes from a corporation's capital structure, but without limiting tax flexibility as corporations do.
A big advantage LLCs have over corporations is that they are completely free from double taxation, which can be a problem when sharing profits and losses in a corporation.
S Corporations and C Corporations, both of which are types of corporations, allow taxation at the shareholder level. An S Corporation and C Corporation do not, however, provide the same liability protection that LLCs can.
S Corp shareholders are generally only liable for what they invest in the S Corporation (known as capital contributions), and S Corporation debt cannot be guaranteed by individual S Corporation shareholders like limited liability members.
Corporate shareholders also have less flexibility in structuring their companies. S Corporations and C Corporations are both required to have a board of directors, which S Corp shareholders can only vote for.
The basic characteristics and components of business ownership structures, which are also mentioned in an LLC operating agreement include:
- Purpose of the Company
- LLC Ownership Structure
- Business Debts and Liabilities of the Company
- Membership Interests
- Responsibilities and Duties of The LLC Members
A few exceptions exist where businesses are required by law to use a specific business structure, such as if it's a financial institution. In those cases, the company must use federally approved business structures.
LLC Membership Interest vs. Corporate Stock
LLC membership interests and corporate stock both represent ownership — but they work very differently in practice.
With a corporation, every share works the same way — you buy one, you get the same rights as everyone else who bought one. With an LLC, ownership is a blank slate. Two members can own equal stakes but walk away with completely different profit splits, voting power, or decision-making roles.
Corporations also carry 3 structural obligations that LLCs do not: a board of directors, formal bylaws, and shareholder meetings.
If you're chasing venture capital or eyeing a public listing one day, a corporation's stock structure will open more doors. But if you're running a small business and want ownership flexibility without the boardrooms and bylaws — an LLC is almost always the better call.
FAQs
Can an LLC Issue Stock?
An LLC cannot issue stock, only membership interests to owners. Thus, LLC shares cannot be freely bought and sold or divided up in any way; membership interest transfer must be done following the membership agreement. However, an LLC can issue something similar to a Membership Units stock.
What Are the Names of a Limited Liability Company’s Shares?
The names of a limited liability company's shares are called 'membership interests.' These interests represent an individual's ownership stake in the company. Membership interests are typically divided into units or percentages, indicating each member's ownership portion.
How Can You Sell LLC Shares?
You can sell LLC shares by first, reviewing the operating agreement. Next, determine the value of the shares through appraisal or agreement with buyers. Then, draft a purchase agreement detailing terms and conditions. Finally, complete the transaction by transferring shares and updating the company's records and your personal assets.
What Is the Equivalent of Shares in an LLC?
In an LLC, the equivalent of shares is ownership interests. LLC members hold interests representing their ownership stake in the company. Their interests are generally documented in an LLC membership certificate.
References:
- https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
- https://www.law.cornell.edu/cfr/text/31/800.255
- https://www.upcounsel.com/transfer-of-membership-interest-in-llc
