LLC Shares: Everything You Need to Know
LLC shares are not shares in the traditional sense. 3 min read
LLC shares are not shares in the traditional sense. An LLC is a limited liability business structure, which includes features of both a partnership and an organization. In addition to being the least complex business structure, an LLC is also flexible.
Unlike a sole proprietorship or partnership, an owner's interests in an LLC are not represented by shares. In addition, an LLC provides legal protection for its owners' assets and results in limited liability for financial obligations related to the business and debts. Establishing an LLC also results in the benefit of pass-through taxes.
What Is an LLC?
- The precise requirements and formation for establishing an LLC depend on the state. On the whole, it is a straightforward procedure.
- Generally, setting up an LLC involves completing a minimal amount of paperwork and submitting the LLC fee.
- The ownership of an LLC is determined by percentage ownership.
- An LLC can split its ownership interest in various ways: Owners are called members and members can have varying voting rights and different claims to assets in the business.
- As a result, an LLC must have an operating contract in place that sets out how the interests will be organized.
LLC Ownership Percentages
The ownership of an LLC is indicated in two ways. The first is by percentage and the second is by membership units. Membership units are the equivalent of shares in a corporate structure. These units give members the entitlement to vote and to a portion of business profits.
Another difference between an LLC and a corporation is that an LLC can allocate its members' interests however it likes. This does not have to depend on the capital or assets that a member gives to the LLC. For example, John gives $10,000 to an LLC and acts as a silent partner. Meanwhile, Greg does not provide any money but manages the company every day. Both members can still divide the interests on an even basis.
LLCs can be structured according to various levels of member interests. These offer versatility for significant distributions of profits and voting rights. For instance, it's possible to establish a class for “special-voting” units. These could allow for 10 votes per unit or a particular amount of earnings before the “regular voting” units.
Selling owners' interests must be carried out according to government and state securities regulations. However, if you are not promoting the sale of the interests and if you are involving a group of fewer than 35 investors, most of the rules will not apply.
In contrast, if you are attempting to involve a bigger group of investors to raise a large sum, it might be necessary to seek advice from a lawyer.
Properly-Issued LLC Membership Interests
When members' interests are allocated correctly, the following should be fulfilled:
- First of all, LLCs must produce a written and signed Operating Agreement that sets out the members' interests.
- These membership interests can be conveyed as percentages. For example, four members may have a 25 percent interest.
- Members' interests can also be conveyed as units. These are comparable to shares in a corporate structure.
- An Operating Agreement should also set out the payment that will be paid for members' interests in the LLC.
- Generally, this consideration is in the form of a cash payment. But it is possible for it to also exist as an alternate benefit, for example, the relocation of assets or supplying of services.
- The type of consideration is decided according to the Operating Agreement and the specific state regulations.
- Secondly, proof that each member has paid the required consideration must be shown.
- Third, an LLC must keep and maintain a record book that files the LLC's crucial documents.
- This book must contain the company document submitted to the Secretary of State and Operating Agreement.
When the consideration is cash, there is a requirement of documentation of the detailed sum. The documentation must show that the amount has been transferred to the LLC's bank account. If it is a non-monetary consideration, a written agreement between the member and the LLC must be signed. In the agreement, the member must state the detailed consideration.
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