Key Takeaways

  • LLC shareholders technically do not exist; LLC owners are called "members" and hold membership interests rather than shares of stock.
  • Membership interests can be divided into percentages or units and determine voting power, profit distribution, and management rights.
  • Unlike corporate shareholders, LLC members’ rights and obligations are defined by the operating agreement, not by corporate bylaws or stock classes.
  • LLCs offer flexibility in profit allocation, member management roles, and taxation, which can be as a sole proprietorship, partnership, or corporation.
  • Transferring ownership in an LLC usually requires compliance with the operating agreement and possibly unanimous member approval.

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.

Overview

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
  • Transferability

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.

How LLC Ownership Differs from Corporate Shareholding

While corporations are structured around issuing shares of stock to shareholders, LLCs operate on the basis of membership interests. This distinction impacts:

  • Ownership Representation: Corporations track ownership through share certificates, whereas LLCs represent ownership through percentage or unit-based membership interests.
  • Legal Rights: Corporate shareholders have rights defined by corporate law and bylaws, including voting on directors and certain major corporate actions. LLC members’ rights are governed by the LLC’s operating agreement, which can be customized extensively.
  • Profit Allocation: Shareholders receive dividends proportionate to share ownership unless otherwise structured, while LLC members can agree to profit-sharing arrangements that are not strictly tied to ownership percentage.
  • Regulatory Structure: Corporations must adhere to more formal requirements, such as issuing annual reports to shareholders and holding shareholder meetings. LLCs generally have fewer formalities, allowing members to adapt governance to the needs of the business.

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.

Membership Interests and Unit Structures

In LLCs, ownership is most commonly expressed as a percentage of the company, but some LLCs choose to issue membership units to define ownership more precisely, similar to shares in a corporation. These units do not represent stock but function as a way to:

  • Divide ownership among members in specific quantities
  • Track voting rights, profit shares, and capital contributions
  • Facilitate transfers or buyouts based on unit counts rather than abstract percentages

The LLC’s operating agreement should specify whether ownership is tracked in percentages, units, or a combination of both. This document also outlines the process for issuing new units or admitting new members, ensuring transparency and preventing disputes.

Management Structure

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:

  • Member-managed
  • Manager-managed

Voting Rights and Decision-Making

In corporations, voting rights are usually proportional to the number of shares owned, unless special share classes exist. In LLCs, voting power is determined by the operating agreement and can be allocated in several ways:

  • Proportional Voting: Members vote in proportion to their ownership interest.
  • Equal Voting: Each member has one vote regardless of ownership percentage.
  • Weighted Voting: Certain members have enhanced voting power for specific business decisions.

Major actions—such as amending the operating agreement, dissolving the LLC, or admitting a new member—often require unanimous or supermajority approval. This flexibility allows LLC members to tailor governance to their specific needs while protecting individual interests.

LLC Members

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.

Transferring Membership Interests

Unlike corporate shares, which are generally freely transferable unless restricted, LLC membership interests are often subject to significant limitations. The operating agreement typically governs:

  • Approval Requirements: Many LLCs require unanimous member consent to transfer an interest to a new party.
  • Right of First Refusal: Existing members may have the option to purchase the departing member’s interest before it’s offered to outsiders.
  • Valuation Methods: The agreement may establish formulas or procedures for determining the buyout price of a membership interest.
  • Restrictions on Partial Transfers: Some agreements limit transfers to the entire ownership interest rather than a fraction.

These restrictions help maintain control over who becomes a member, preserving the trust and working dynamics among owners.

Frequently Asked Questions

1. Can an LLC issue shares like a corporation?

No. LLCs cannot issue corporate stock. Instead, they allocate membership interests, which represent each owner’s share in the company.

2. Are LLC members the same as shareholders?

Not exactly. Members own a direct interest in the LLC, while shareholders own stock in a corporation. The rights and rules governing each differ significantly.

3. How are voting rights decided in an LLC?

Voting rights are set in the operating agreement and can be proportional to ownership, equal for all members, or customized for specific decisions.

4. Can I transfer my LLC ownership to someone else?

Possibly, but most operating agreements require member approval and outline specific procedures for transferring ownership.

5. Can an LLC have both members and shareholders?

No. An LLC can only have members. However, an LLC taxed as a corporation may adopt some corporate-like governance features without changing ownership terminology.

If you need help with understanding the role of LLC shareholders, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.