Limited Liability Companies (LLC) are organized differently than all other types of corporations in the sense that, like a partnership or sole proprietorship, it does not issue stock.
Instead of selling shares to investors (like in an initial public offering), owners sell pieces of their business interest directly to others.
This is called transferring the ownership interest of the business.
LLCs and their owners enjoy limited liability and taxation flexibility, both of which attract many new businesses to this structure.
LLC Structure vs Corporate Structure
An LLC structure is not the same as a corporation's, and many people confuse the two or think that they are interchangeable.
An LLC does not issue stock; rather, owners receive interests in proportion to their capital contribution to the company (the amount of money they put in and pay upfront). Corporations on the other hand can issue stock.
The main purpose of LLCs is to provide the same level of liability protection that comes from a corporation's capital structure, but without limiting tax flexibility like 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.
LLCs do not pay corporate taxes on the company's income every year, but instead, pass-through taxable income or loss to each member annually.
S Corporation and C Corporation, 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 LLC 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.
An LLC is not formed by filing papers with the state. Instead, the organizers of the business create and sign articles of organization and file them by submitting a form to their Secretary of State (or equivalent) office.
This article describes the basic characteristics and components of an LLC, which are also mentioned in an LLC operating agreement:
- Purpose of the Company
- LLC Ownership Structure
- Liabilities of the company
- Membership Interests
- Responsibilities and Duties of The 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 a federally approved business structure.
LLC Members
LLC owners are the members and managers of an LLC that have certain rights and responsibilities.
The members cannot be held personally liable for the debts or obligations of the LLC, but they may still be taxed on business income even if not distributed to them by the company.
They also can participate in management decisions such as selecting new members and managers. Members manage the business casually, but this is not required of them.
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.
An LLC does not issue stock, only membership interests to owners.
Thus, these shares cannot be freely bought and sold or divided up in any way; however, the transfer must be done following the membership agreement.
Issuing Shares In LLCs
The way to issue shares in a Limited Liability Company is to do a contribution of 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.
Some states do not permit an LLC to have multiple classes of LLC shares, which means all members have equal rights unless otherwise specified in the operating agreement.
The company can issue different classes of LLC shares if authorized by the state it operates. This allows more than one class of membership interests with different economic or voting rights.
Read More: How to Capitalize an LLC
While it is not required that all LLCs have operating agreements, they are strongly recommended by business experts because the law outlining what an LLC can do is relatively brief compared to corporations and partnerships.
Characteristics of LLC Shares
Here are a few things 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.
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 profits in proportion to the percentage of ownership that they hold (which is not necessarily linked to how much money was invested).
Buy and Sell Shares
The members are also entitled to buy or sell their shares in the company. These may be bought out by another member for profit, sold to another person interested in investing in the company, or exchanged between existing shareholders as a means of settling debt.
LLC Dissolution and Liquidation
The company will have the option of being liquidated, which means it can be dissolved and all its assets are sold to repay outstanding debts.
The money raised from this sale must pay off any creditor claims before being divided up among the members to their percentage interest in LLC.
FAQs
Can an LLC Issue Stock?
A Limited Liability Company does not 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 stock, called Membership Units.
What is a Membership Unit?
A Membership Unit is an interest in the rights and duties of a single member that arise under your LLC's Articles of Organization or Operating Agreement.
Can an LLC Buy Back Its Stock?
LLC members can purchase the membership interests of other members, so opportunities for buying back the membership interest should be explored in case it's necessary to do so.
What Are the Names of a Limited Liability Company’s Shares?
Shares of an LLC are called "membership interests" or "units" depending on the company's operating agreement.
How Can You Sell LLC Shares?
Shares are sold by transferring money or property to the company.
Can LLCs Issue Stock...
In conclusion, LLCs do not issue stocks, but they do issue shares. These shares are not just like those in a corporation.
They do offer certain amounts of profit sharing and voting rights but they also provide more flexibility than the law allows corporations to have.
