Can An LLC Issue Stock: Everything You Need to Know
Are you wondering, "Can an LLC issue stock?" A limited liability company is considered a business structure that involves a small group or single individual who will act as owners and members. 3 min read
LLCs and Corporations
Are you wondering, "Can an LLC issue stock?" A limited liability company is considered a business structure that involves a small group or single individual who will act as owners and members. During the life of an LLC, you can replace, add, and subtract members. This member will be bound to the company through a partnership agreement instead of stock insurance or option grants.
When members are part of an LLC, any debt or obligations that the company will take on will be the responsibility of the company and not the individuals. So in the event of a lawsuit, the personal assets of the individual members will be protected under the law. Along with this personal liability protection, LLC owner's will enjoy some tax deductibility of most of their expenses related to the business.
An LLC operates much like a partnership with less ability and less business maintenance. Starting an LLC is similar to a corporation in the fact that they are created by filing documentation with the secretary of state. Yet an LLC will file Articles of Organization and a corporation will file Articles of Incorporation. To be considered a corporation, Articles of Incorporation will have to be filed and the secretary of state will have to notify the business of their incorporated status.
Unlike an LLC, the ownership of a corporation will be determined by the amount of stock that each owner has. Each piece of stock acts a small fraction of the company. This stock can be divided equally among owners to give them complete ownership over the corporation. To prevent an outside entity from getting controlling status of a corporation, the corporation will likely retain at least half of all stock shares.
A stockholder's percentage of ownership in the company will be directly linked to the percentage of corporate shares they own. These investors will receive interest in the company through the purchase of stocks. While they may have a financial interest, they leave it to the corporation to run the business including expansion, development, hiring, etc. Stock is generally allowed to be freely transferred, which also transfers the voting rights that go along with it.
LLCs Have Membership Interests
Instead of stock interest, LLCs have what is referred to as membership interest in a company that gives them the right to participate in the business and determines what share of the earnings and assets they are entitled to.
Unlike stock, member rights cannot be transferred to a third party through a nonmember may purchase the financial interest of a member. This purchase does not allow them any right to participate in the business so it ensures current members do not suffer disruption that can occur due to frequent changes in ownership. Most states will allow LLC members to transfer their management rights when drafting their Operating Agreement if they so choose to do so.
LLCs and Stock
Since an LLC structure is primarily a private ownership arrangement, it prevents LLCs from being able to issue stock. Only corporations (such as C or S corporations) are allowed to issue stock, although an LLC is often allowed to issue such debt instruments as bonds.
Issuing a bond from an LLC can be similar to issuing stock, but it can be a much more difficult process and most likely will require the LLC to retain the services of a bank or specialist that can issue debt instruments. To raise working capital, an LLC member can sell portions of the company. In organizations where the ownership is closely held, sometimes portions of the company may be sold to family members or close friends.
LLC Ownership Structure
When it comes to LLC ownership structure there are a few common trends and requirements found across different state statutes including:
- Members in an LLC must have equal rights.
- Members will typically have an ownership amount based on their investment.
- Sweat equity can often be provided instead of a financial investment by LLC members.
Preferential LLC Ownership
In a corporation, there can be both common and preferred shares issued. Preferred stock will typically come with dividend preference and the right to a portion of assets if the company dissolves. Since an LLC does not distribute stocks, certain preferential rights can be granted to members, which will be laid out in the Operating Agreement.
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