Does an LLC Have Shareholders: Everything You Need to Know
Does an LLC have shareholders? The short answer to this question is no. However, before you make any decisions regarding whether to file an LLC (Limited Liability Company) or corporation, you should know of the differences between shareholders in a corporation and members in an LLC.4 min read
2. Benefits of an LLC
3. Differences Between a Shareholder and Member
4. Business Management
5. Transfer of Ownership
6. Repayment to Creditors
7. Profit Distribution
Does an LLC Have Shareholders
Does an LLC have shareholders? The short answer to this question is no. However, before you make any decisions regarding whether to file an LLC (Limited Liability Company) or corporation, you should know of the differences between shareholders in a corporation and members in an LLC.
LLCs generally don’t have shareholders, officers, or directors. Rather, the owners of the LLC, also referred to as members, oversee the daily operations of the business. Furthermore, an LLC does not have stock for this same reason.
Benefits of an LLC
Although an LLC doesn’t have shareholders nor do they issue stock, there are still many benefits to operating an LLC, including the following:
• Pass-through taxation
• Limited liability for members
• Issuance of bonds
While the LLC offers limited liability for its members, there is a greater possibility of piercing the corporate veil for members in an LLC as opposed to shareholders in a corporation. This means that if a lawsuit is brought against the LLC for allegations of fraud, the plaintiff can pierce the corporate veil and hold the member(s) personally liable.
While an LLC cannot issue stock, it can issue bonds to non-members of employees of the company. Bonds are considered a debt instrument that helps an LLC raise capital to expand and grow.
Differences Between a Shareholder and Member
While both shareholders and members have ownership interest in their respective businesses, there are many differences between these two types of ownership, particularly with regard to the following:
• Rights to manage the business
• Rights to transfer ownership interest
• Repayment to creditors
• Profit distribution
In addition to the difference in ownership, it is evident that LLCs and corporations operate differently, especially when it comes to tax treatment.
The management of an LLC is setup in the company’s operating agreement, and must be agreed upon by all members of the business. The agreement will specify how the LLC will be managed, and what roles and responsibilities each member will have. This document will also lay out the decision-making process for transfer of ownership rights, what happens when a member dies or goes bankrupt, how to dissolve the business, and the voting rights of each member.
The management structure of a corporation, however, is more formal and controlled by state statute. The owners of the corporation are shareholders who receive stock certificates. These shareholders then choose a board of directors on a yearly basis. These directors will set rules and decision-making processes for the corporation. The board of directors will also obtain additional officers as needed. Therefore, while the board of directors comes up with the management structure, it is the officers who oversee the daily operations of the business.
Transfer of Ownership
In a corporation, each owner (shareholder) has an equal percentage of ownership, along with equivalent voting powers. LLC members, however, can have disproportionate ownership interests, depending on how much money each member contributes to the LLC.
In terms of the right to transfer ownership, C corporations can issue shares to different stock classes. Keep in mind that C corporation profits are taxed at the corporate and shareholders level (double taxation), therefore, small businesses usually choose to operate either an LLC or S corporation. S corporations can only issue one class of stock, with no more than 100 shares being given out. This means that the S corporations number of shareholders is limited since there are so few shares.
LLCs have no limit on the number of members – and the ownership of each member can be entirely different from another member. For example, one member might have 5% ownership in the LLC, whereas another member could have 45% ownership in the LLC. With that said, the member with 5% ownership could have more rights and responsibilities than the member with 45% ownership. This is all laid out in the LLC operating agreement.
Repayment to Creditors
Creditors can take all shares that are given out in an S corporation. For this reason, if a creditor takes enough shares in the S corp, the creditor could now have an ownership stake in the business. However, creditors of an LLC can only take the charging order, meaning that a creditor can take no more than what the LLC member invested into the company.
The LLC operating agreement can indicate that interest in profits can only be distributed to certain members. However, S corp profits are distributed based on the number of shares each shareholder has. Keep in mind that the income earned by LLC members must be included on their personal tax returns as self-employment taxes.
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