LLC Shareholders: Everything You Need to Know
LLC shareholders do not technically exist in this type of business entity rather an LLC is made up of owners, who are referred to as "members."3 min read
LLC shareholders do not technically exist in this type of business entity. Instead, an LLC is made up of owners, who are referred to as "members." Although members may be referred to as shareholders, they differ from a corporation's shareholders.
When forming an LLC, members will be assigned membership interest. Instead of purchasing stock, which does not exist in an LLC, members are personally invested in the company as they will be the owner or a partial owner. When aiming to transfer membership interest, the guidelines to do will be outlined in the company's operating agreement.
Unlike a corporation, a limited liability company is somewhat of a "hybrid" business structure. Combining the benefits of a corporation and partnership, an LLC is a popular business structure. Once you form an LLC, you will assign members, not shareholders.
Although an LLC can be taxed as a corporation, it cannot have a stock program.
Instead of having company shareholders, your LLC will have owners — or in this case, "members." Legally, these members are treated differently than corporate shareholders. Although LLC members and corporate shareholders are similar in that they both have interest in the company, they are significantly different. Just some of the ways that LLC members differ from shareholders include:
- Management rights
- Debtor accessibility
- Receipt of profits
Taxation is also a major difference between these two entities. However, the extent of this difference will largely depend on how the LLC has elected to be taxed. With an LLC, you can seek corporation election. Legally, you would still be treated as a limited liability company but would be treated as a corporation for tax purposes. The type of corporation also plays a role.
Understanding the Terminology When Forming an LLC
In order to form an LLC, you must file all of the required paperwork and submit the appropriate filing fee.
When first forming an LLC, membership interest is typically set up based on percentages. For example, if there are four equally invested members in your LLC, you would each have 25 percent membership interest. Each member would share in the profits consistent with their membership interest.
Although members will be referred to as "shareholders" in certain states, they are not comparable to a corporation's shareholders. In a corporation, shareholders purchase stock in order to obtain their interest in the company. In contrast, an LLC does not issue any stock. All "shareholders" are essentially members who have a personal ownership interest in the company.
Being a popular business structure, many form an LLC because of the associated tax benefits and limited liability.
When setting up the management structure of an LLC, this is completed privately through an operating agreement. Although this is not a requirement in most states, it is highly recommended. This agreement will define the duties of each member or manager, as well as the voting rights, any buy-out protocols, and how the company would be dissolved if applicable in the future.
These terms are often decided between members. Unlike corporations, LLCs do not generally have directors, officers, or shareholders. Although possible, it is rare for an LLC to be organized with these roles in mind. In terms of management, an LLC can follow one of two structures:
Each member of an LLC will participate in managerial tasks — unless you decide to be a manager-managed LLC. In this case, one person will make all of the decisions. Members tend to be fairly hands-on, enjoying the protection of their personal assets. When paying off company debt, for instance, only LLC assets can be used. It is important to note that limited liability protection does not apply if one member harms another individual or there has been a case of fraud.
If you are forming an LLC, it is important to understand your role, especially if there are multiple members involved. Remember, unlike a corporation's shareholders, LLC members cannot purchase stock. Instead, you will be personally invested in the company based on your membership interest. If you have questions about membership structure or you would like to create an operating agreement, legal assistance is available.
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