LLC Issue Shares: Everything You Need to Know
"Can an LLC issue shares?" is a common question you might have if you're thinking about establishing a limited liability company for your business. 3 min read
"Can an LLC issue shares?" is a common question you might have if you're thinking about establishing a limited liability company for your business. Corporations and LLCs are two of the most common business structures chosen by entrepreneurs. Both these entities offer personal liability protection, but the way that ownership interests are issued differs. LLCs cannot issue stock, but instead have multiple owners, known as members, who receive a percentage of the profits and losses in exchange for their ownership interest. In contrast, corporations offer stock certificates to their shareholders who can freely buy and sell their shares.
Although LLC members are bound by a signed agreement rather than by the issuance of stock certificates, LLCs can issue bonds to attract financing. However, this process is much more complex than the process of issuing stock. It may require consulting with a firm that specializes in issuing bonds, such as an investment bank.
LLC members report their shares of the business's profits and losses on their individual tax returns, but corporate taxes are not incurred by the LLC itself. Corporations are subject to double taxation, in which profits are taxed at the corporate level when earned and again at the individual rate when they are distributed to shareholders.
Both LLCs and corporations offer their members and shareholders limited liability protection. This means that personal assets cannot be seized to satisfy the debts and financial obligations of the business.
A corporation issues percentages of its ownership to shareholders in small units called stock. The total percentage of stock shares issued must equal 100. Each shareholder's ownership percentage depends on the number of his or her shares and the total number of outstanding shares. Stock certificates and their associated voting and financial rights can be freely transferred in most states.
Most corporations retain 50 percent or more of their outstanding stock shares so that another business cannot completely take over by buying them out. The remaining shares are sold in exchange for financial investment that allows the corporation to grow and expand.
LLC Stock Exceptions
Although an LLC cannot issue stock, the members can generate capital for the business by selling ownership shares in the company. These shares are not publicly traded like those of a corporation and are subject to many restrictions. For example, shares can only be sold by members to family members, friends, and close acquaintances. This type of LLC is known as a closely held organization.
Preferential LLC Ownership
Corporations can issue common and preferred stock shares. The latter type provides the holder with preferences in receiving dividends and company assets if liquidation occurs; it sometimes provides special voting rights as well. Although an LLC cannot issue preferred shares since it does not issue stock, it can assign rights and benefits to certain members but not to others in the operating agreement.
This strategy can also be used to provide other benefits, such as providing a larger share of liquidated assets to a certain member. An LLC can also assign income to members independently from their ownership percentages, which is not an option for corporations. This provision, known as special allocation, must be IRS-approved.
LLC Member Interest Rights
An LLC member's ownership interest gives him or her the right to participate in the management of the business and receive a specified share of earnings. However, the member cannot transfer all of his or her rights to another individual or business. If he or she sells shares to another person, that party doesn't have the right to participate in the LLC's business. However, they do receive the same financial interest as the member who sold them the shares. This prevents disruption to LLC operations when shares are sold. The LLC members can agree to a procedure for transferring management rights and document it in the operating agreement.
Both LLC members and corporate shareholders have a right to the business's earnings and assets. Shareholders often receive percentages of after-tax earnings as dividend payments. This is at the board of directors' discretion. LLC members may also receive profit distributions periodically.
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