Does an LLC Have Shares: Everything You Need to Know
Does an LLC have shares? No. Only businesses structured as a corporation issue shares. With a limited liability company, ownership is expressed by percentage and membership units. 3 min read
Does an LLC have shares? No. Only businesses structured as a corporation issue shares. With a limited liability company, ownership is expressed by percentage and membership units.
Information About an LLC and Shares
LLC owners are referred to as members. Each member has a claim to business assets and a portion of the LLC's profits.
Ownership interests in an LLC-structured business do not receive shares. The percentage and membership units give them the right to share in the profits of the business and the right to vote on business matters.
While LLC owners make the decisions on the business structure, operation of the LLC, and policies and procedures, it is not required to have a board of directors or multiple owners.
LLC statutes vary in each state but one that is consistent in all states is the ineligibility of an LLC to issue stock.
Only businesses structured as a C-or S-corporation are allowed to issue stock.
Although LLCs cannot issue stock, there are no LLC statues prohibiting a business from issuing bonds.
The process to issue bonds is much more complex than issuing stock. Using the expertise of a firm knowledgeable in issuing bonds is recommended.
The LLC Structure vs the Corporate Structure
A signed agreement among LLC members binds them as owners of the business versus the issuance of stocks or option grants.
An LLC is taxed by the IRS as a pass-through entity since no stock is being issued to its members.
At tax time, members of an LLC will report their share of the business profits when filing their personal tax return. This is the opposite of a C-and S-corporation where members receiving stock are double-taxed.
In a corporation such as the C and S types, profits are first taxed at the corporate level. Any after-tax profits are then distributed to the corporations' shareholders where the profits are then taxed as capital gains when filing personal tax returns.
In an LLC-structured business, the members have a personal interest in the formation of the business. The interest in the business does not revolve around purchasing stock.
As a member of an LLC, members are more apt to be exposed to the piercing of the veil principle versus shareholders in a corporation. The principle has to do with fraudulent behavior that is no longer hidden behind the protection of an LLC.
Exposure to this principle is more likely with LLC members because of their day-to-day involvement with the business operation whereas shareholders in a corporation are more focused on profitable returns on investments.
An LLC also has the option to be organized with a variety of classes with different ownership interests. This allows the LLC to be more flexible in terms of profits and voting power allocations.
LLC members can receive an ownership stake by investing financially or through "sweat equity" by providing certain professional services.
For someone to join the LLC at a later date requires the current members to unanimously agree to accept the new member or a new member may join if there are stipulations outlining the process in the LLC's operating agreement.
A corporation does not have as many steps involved in accepting new shareholders.
Whereas LLCs cannot issue stock or preferred shares, a corporation can issue both common and preferred shares.
Preferred stocks include:
- The rights of a preference in dividends.
- The preference in receiving company assets should the business be liquidated.
- Preferred stock also includes special voting rights.
LLC members may agree to assign benefits and rights to designated members if this is outlined in the operating agreement.
An operating agreement also may be used for:
- Assigning rights to some members but not to others such as granting veto power to one member on issues that call for a vote.
- The agreement may also outline other options/benefits that are similar to a corporation's preferred stock.
- The operating agreement terms may provide information regarding the liquidation of the LLC and the disbursement of proceeds to one member.
- Assigning LLC income to members at a percentage that is greater than their proportion of ownership is another option when included in an operating agreement.
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