1. Understanding Stocks
2. Understanding Bonds
3. Formation of LLCs vs. Corporations
4. Ownership of LLCs
5. LLCs Electing as a Corporation
6. How Are Profits Handled?

Do LLCs issue stock? The short answer is no. An LLC has multiple or single owners, also referred to as members; they can join or leave at anytime during the LLC's lifetime and each member receives varying amounts of the profits. The LLC is a pass-through entity, and no stock is issued.

LLC organizations are allowed by the IRS to be considered corporations for tax filing purposes, but this status only applies to taxes, not the ability to issue stock. Only a true corporation is allowed to issue stock.

Understanding Stocks

A stock is a unit representing ownership of a corporation. Shareholders completely own the organization, with each share of stock representing a fraction of this ownership. To keep other entities from taking over the corporation, a corporation may choose to keep at least half of the shares. 

Each share represents a financial investment in the organization, providing capital for the corporation to use in running the business. Each shareholder owns a percentage of the corporation that corresponds to the amount of his shares and the amount they are worth. In most states, shareholders are free to sell their stock at any time, which includes any voting rights they might have. 

Corporations can issue different classes of stock. Common stock gives owners voting rights as to how the company is run. Preferred stock may or may not include voting rights, but if the corporation goes out of business and is liquidated, these shareholders will be paid off first.

Understanding Bonds

Stock is ownership in a corporation, which only a corporation can issue. However, LLCs are free to issue bonds to raise capital for running the business. The bond is purchased from the company that issues it; it is a form of loan, and the company must later buy it back from the investor with added interest.

Formation of LLCs vs. Corporations

The process of forming an LLC is similar to forming a corporation, but there are a few differences.

  • LLCs require articles of organization to be filed with the state. 
  • LLCs require an operating agreement to lay out the interests of the members with regard to their ownership.
  • Corporations require articles of incorporation to be filed with the state.
  • Corporations require a board of directors and written bylaws, and are then able to issue stock.

Ownership of LLCs

In an LLC, each member has a percentage of ownership in the company; this is not the same as stock. An LLC may be owned by a small group of people or by a single person. Though it cannot issue stock, members are allowed to sell their interests in the company to other people as a means to raise money for the needs of the business.

LLC members report their share of the profits on their own personal tax returns as income; the business itself is not taxed. However, LLC members are not liable for debt or lawsuits that involve the company, as long as it comes about through normal business operations. Therefore members' personal assets are protected. 

Unlike LLCs, owners of C corporations or S corporations, which can issue shares of stock, are taxed twice on the same profit. The corporation pays taxes on these profits, and when they are issued to shareholders as dividends, they too are taxed on this income on their personal returns.

LLCs Electing as a Corporation

For the purpose of taxation, LLCs are usually considered disregarded entities by the IRS. This means that the profits and losses pass through the company and are reported on members' personal taxes. However, LLCs can elect to file as a corporation for tax purposes. When doing this, the LLC must file its own taxes. This has advantages and disadvantages, but does not give the LLC other abilities that a corporation has, such as selling shares of stock.

How Are Profits Handled?

Profits are handled differently by LLCs and corporations. With a corporation, shareholders of common stock may receive dividends, which are distributions of profit, as allowed by the board of directors. 

These rules govern LLCs:

  • LLC members receive periodic distributions of profit from the company.
  • LLCs are not required to be distributed to members, unless specified in the operating agreement.
  • LLCs may not issue payments to members if the money is needed to pay bills or meet other obligations.
  • LLCs' distribution of profits must not result in higher liabilities than assets.
  • If distributions are made improperly, the responsible member is liable for the amount of the distribution.

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