Does an LLC Issue Stock: Everything You Need to Know
Does an LLC issue stock? Not exactly, but the answer is more complicated than it may seem.4 min read
Does an LLC issue stock? Not exactly, but the answer is more complicated than it may seem.
An LLC is popular because of the flexibility it offers small business owners. It may have either single or multiple owners, commonly called members. Unlike corporations, LLCs do not need a board of directors. Owners of LLCs can write their own operating agreement laying out the structure and rules for their company.
LLC stands for limited liability company, and it has a lot in common with partnerships and corporations, although it's got many differences as well. Owners/members of LLCs are protected from liabilities such as legal issues and debts. LLCs may elect to be taxed as a corporation, but this is only for tax purposes. LLCs do not issue shares like a corporation.
What Are Stocks?
Stocks are small units that represent ownership of a corporation. Shareholders completely own the business through their stock shares, each of which represents a fraction of the business assets. Corporations may choose to keep at least half of their shares of stock, which prevents any other shareholders from taking control of the business.
By selling stock, corporations give their investors part ownership of the business. In return, they receive capital with which they can run the business by hiring workers, buying equipment, researching or developing products, etc. Corporations are the only type of entity that has the ability to issue stock.
Shareholders may transfer their stock at any time in most states by buying or selling it. Transferring a share of stock in a corporation gives the new owner voting rights.
Ownership of an LLC
While a corporation's ownership is determined by the number of shares owned, an LLC's ownership is directly based on a percentage of the company. Most LLCs require their members to have equal rights regardless of their percentage of ownership.
Partial ownership of an LLC may be issued in return for non-monetary contributions such as professional services rendered. Either a single person or a group of people may own the LLC. Also, division of ownership may be arranged in different ways. Members may offer different amounts of capital and split profits however they like. Despite this flexibility, it's best to lay it all out in an operating agreement so there will be no disputes or confusion.
This private ownership system is the reason why LLCs are not able to issue stock. Instead, it raises capital by selling percentages to friends, family, close acquaintances, or others with whom existing owners have established a business relationship.
While an LLC is not allowed to issue stock shares, it is allowed to issue bonds. Bonds serve the same purpose as stock, which is to obtain financial capital for operating expenses. Issuing bonds is a more complex process, however. The LLC will need to work with a firm that handles these debt instruments, such as a bank that deals with investments.
Another way that LLCs may raise capital is to add owners/members, or reallocate the ownership percentage to other owners/members who increase their financial contribution. This may be accomplished by a “preferred stock” arrangement, which, like a corporation's preferred stock, offers priority for distributing assets in case the company goes out of business. This arrangement can also offer some members special voting rights, such as the right to veto issues approved by other members.
Although these percentages of ownership may be divided into different classes like shares of stock, they have the following differences:
- They may not be publicly traded on stock exchanges.
- LLC owners are entitled to a share of the profits according to their percentage of ownership.
- Membership rights cannot be transferred without the approval of other members.
- Non-members may purchase a financial interest but this does not entitle them to a right of participation in the business.
- LLC members are protected by debt and lawsuits that may affect the company, as long as they result from normal business operations.
LLC Filing as a Corporation
An LLC is usually considered a disregarded entity by the IRS, which means the LLC is not a separate entity from the owners, and any profits or losses pass through to the owners. However, if the owners decide it's in their best interest, LLCs may elect to be taxed as a corporation. In this case, the LLC must submit its own tax filing to the IRS.
Choosing to be taxed as a corporation does not entitle it to issue shares of stock, or any other privileges that may be issued to a corporation.
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