Do LLCs Have Stock Certificates: Everything You Need to Know
Do LLCs have stock certificates? Limited liability companies (LLCs) do not issue stock, and therefore they do not have stock certificates.3 min read
Do LLCs have stock certificates? Limited liability companies (LLCs) do not issue stock, and therefore they do not have stock certificates.
LLC Versus Corporation
The owners, called members, of an LLC, have interest in the business based on their capital contributions and what's specified in the operating agreement. These are not called shares like the shareholders in a corporation have because the overall structure of the LLC business type is different from the corporation type. Only businesses with corporate structures actually distribute shares.
LLCs also do not have bylaws or the director/officer structure that a corporation does, so they are called unincorporated business entities. Anytime individuals or entities invest in a business, they receive stocks, shares, or distribution percentages of some sort. LLCs are formed by contracts while corporations are formed by statutes.
There are many formalities required in the formation and upkeep of corporations that are not required for LLCs. These are also called corporate default rules. They include:
- Shareholder meetings.
- Appointing of directors and officers.
LLCs are governed by their own operating agreements rather than laws set out by the state or federal government. Other than filing fees and articles of organization, LLCs do not have much for which they need to answer to the state. The operating agreement for an LLC is its governing document. It should include details about the business like:
- Business purpose.
- Management structure.
- Member liability.
- Member obligations and responsibilities.
- Membership interests.
LLC Membership Interest Versus Corporate Stock Certificates
LLCs do not issue stock nor do they have stockholders. The membership interests specified in the operating agreements are essentially the members' stock, but they aren't usually given in certificate form. The members of an LLC are its owners, not shareholders. If an LLC has many owners, the operating agreement may call for issuing membership certificates.
The certificates found in an LLC usually just include the certificate of formation, membership certificates (if issued), and certificates for good standing issued each year by the state. If an LLC decides to issue membership certificates, they will specify the percentage of ownership for each member receiving a certificate.
There are a few basic things you need to understand about the LLC business structure before forming this type of business. All members have a right to share in the profits of the business. Exactly how much each member gets depends on what it stated in the operating agreement.
Membership profit distributions can be determined base on the capital contributions of members, but they don't have to be. LLCs have the freedom to determine membership percentages freely. Some distribution percentages are based on a member's amount of responsibility in the business rather than their capital contribution.
Profit distributions can only take place if the LLC is up-to-date on all of its debt payments and other obligations. If a distribution amount is going to cause the LLC's liabilities to exceed assets, it may not take place.
Multi-member LLCs are automatically categorized as partnerships by the IRS and taxed as pass-through entities. This means that the profits of the business pass-through to the LLC members and those members are required to pay taxes on those profits through their personal income tax returns. If the LLC chooses to be taxed like a corporation, then the business itself will pay taxes and members are also taxed on what they take home. Single-member LLCs are viewed as sole proprietorships in the eyes of the IRS. They are therefore also taxed as pass-through entities.
How to Issue Membership Interests
Once you've formed an LLC, you'll need to allocate the membership interests. This will be handled through the formation of the LLC's operating agreement. These documents should be signed by all of the LLC members. The operating agreement will also specify how the members will pay their initial contributions. Called consideration, this is usually in the form of cash but can also be a service provision or an asset transfer.
All of the details of the various membership percentages and capital contributions of members should be recorded and kept in a safe place. Many LLCs choose to keep a record book for such details and transaction information. Along with a record book, you'll want to keep the operating agreement and articles of formation together as well. These are called the LLC's formation documents, and they are very important to keep track of.
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