1. What is an LLC?
2. Advantages of an LLC
3. How is an LLC Formed and Governed?
4. Selling Ownership to Raise Capital

If you've wondered, "can an LLC sell stock," you should know that an LLC generally cannot sell stock, and in most cases, no reason exists for doing so anyway. The structure of a Limited Liability Corporation (LLC) divides ownership by percentages among the participants in the agreement. The participants are called members. They sign a partnership agreement to define the interests rather than using stocks or grants to distribute ownership. All members have equal rights to participate in the management of the LLC.

When capital is needed, a percentage of ownership can be sold to a new member. As members come and go, the ownership percentages can change. In most states, bringing in a new member only requires the unanimous consent of the other members, as long as 100 percent of the ownership is allocated at all times. Bringing on a new member requires other members to sell some of their ownership interest. By law, this requires every member's consent since it reduces the value of the individual percentages. The first step in bringing on new members is to gain the agreement of all existing members.

What is an LLC?

An LLC is one of many choices for the legal structure of a business. Some examples aside from the LLC are C-corps, S-corps, corporations, and partnerships. Each option has a different way of dealing with liability, taxes, rights, and other business matters. Business owners should consult a professional, such as an accountant or lawyer, to determine the best structure for the situation. The right decision gives a new business the best possible start.

The LLC structure combines features of a corporation and a partnership. In many ways, it is managed like a partnership. Ownership of the company is defined by the members' percentages. The IRS classifies an LLC as either a single-member organization or a multiple-member organization based on the number of members involved. LLCs are also governed by the laws of the state in which they are formed. Those state laws do not distinguish between the two types of LLCs based on the number of members.

Advantages of an LLC

Operating as an LLC offers distinct advantages over other corporate structures.

  • The creation of an LLC offers legal protections that you don't get from a sole proprietorship or a partnership. The protection is similar to that of a C-corp or an S-corp. Members are not liable for the LLC's debt or lawsuits against the company's operations. Assets owned by the individual members, like money and property, are protected in this way.
  • No shares are issued, as in a corporation, reducing the regulatory and legal requirements.
  • An LLC is a pass-through structure for tax purposes. Members are taxed on their individual returns. This is different from a C-corp or an S-corp that issues stock. In those structures, members are double taxed, once at the corporate level and then again at the individual level when after-tax profits are paid.
  • The members of an LLC have a lot of flexibility to design the operating agreement and detail things like voting rights, capital contributions, and profit distribution.
  • If an LLC is sold, it can be sold as one entity without having to change bank accounts or the tax ID number. With a partnership or sole proprietorship, all of those things would have to be changed when the business is sold.

How is an LLC Formed and Governed?

An LLC is established under state law and governed like a partnership. The process varies by state. It's usually a straightforward matter of filing the correct documents and paying the fees. State laws govern certain aspects of the LLC's operation, such as equity capitalization and the raising of funds through the sale of ownership percentages.

Selling Ownership to Raise Capital

Selling ownership percentages to raise funds may sound simple. The LLC accepts the capital from the new member and updates the operating agreement to reflect the changes, but this decision has serious implications for the business. The members are selling part of the company to someone who is likely an outsider. Even if the new member is buying a very small percentage of the company, he or she still gets an equal say in the way the company is run.

If you need help with setting up or operating your business as an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.