How to Issue Share in an LLC: Everything You Need to Know
Distributing shares in an LLC is normally done before the registration of the LLC, and the ownership stake is normally included in the operating agreement.3 min read
Updated June 26, 2020:
Wondering how to issue shares in an LLC? Distributing membership interest in an LLC is normally done before the registration of the LLC, and the ownership stake is normally included in the operating agreement of the LLC. Most LLCs do not issue stock certificates like corporations, although some do. Details about the owners of an LLC, their ownership interest, and how profits are distributed are documented in the operating agreement of the LLC.
LLCs are semi-formal businesses formed at the state level. Like partnerships, LLCs have structural flexibility and are not subject to the corporate requirements of holding shareholders and board of directors meetings. LLC owners have limited liability protection just like the shareholders of corporations, but LLCs have federal pass-through tax status and, therefore, do not pay corporate tax. These unique benefits of LLCs make the LLC entity a sought-after business type for many small business owners.
The process of formation of an LLC differs from that of a partnership in that states require LLC owners to not only appoint a registered agent for service process but also to file the Articles of Organization to the Secretary of State. LLCs are also typically required to file annual reports or a list of members and managers with the state.
However, LLCs do not have the rigid structural and record-keeping requirements of corporations. Such activities like holding directors and shareholders' meetings and recording corporate resolutions do not apply to LLCs.
When LLC Shares Are Issued
Unlike corporations which issue stock after official registration, the names of LLC owners are needed on the Articles of Organization document. This means that the LLC must settle the issue of ownership before the official formation of the company. Of course, the list of members can change and state governments normally require LLCs to update their filings annually and whenever there is a change in membership.
How LLC Shares Are Issued
The process of distributing ownership interest in an LLC is a far cry from the formal and hyped stock issuance of corporations. Although some LLCs issue owners with membership certificates, this is not a requirement and most LLC owners just agree on the details about ownership and formalize these by writing an operating agreement. The operating agreement is not a formal requirement for LLCs, but wise business owners insist on drafting an agreement to prevent future conflicts.
Most LLC members are acquaintances who agree to form an LLC and would typically not need to publicly issue stock to get funding.
Characteristics of LLC Shares
- Different rights
Although most states require LLC members to have equal rights, this can be waived if the LLC's operating agreement specifies otherwise. It is not uncommon to find LLCs with voting and non-voting members and with different rights similar to common and preferred shareholders in a corporation.
- Profit distribution
LLCs can decide on a model of profit distribution. The distribution does not necessarily need to be based on the ownership stake of the LLC member but on other factors, as long as this is stated in the LLC's operating agreement.
- Cash not needed to have an ownership stake
The ownership interest of an LLC can be made independent of the cash contribution of the members. Even members who have not contributed cash can have an ownership stake in the LLC if the LLC's operating agreement allows for this. An example is an LLC owner whose contribution is legal services.
- Liquidation of an LLC
The procedure and share of members during liquidation can be documented in the operating agreement. State laws give LLCs a level of flexibility on the disposal of assets during liquidation. Unlike S corporations that must base their distribution calculations on the number of shares per person, LLCs can use alternative criteria to distribute LLC assets during dissolution.
- Buying and selling LLC shares
Membership interest of LLC owners can be transferred from person to person. The exact process of transfer will depend on the operating agreement of the LLC, but typically the other members must consent before a member sells his interest. This enables LLCs to have perpetual existence and survive the death of a shareholder.
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