Key Takeaways

  • LLC units represent ownership in a limited liability company and function similarly to corporate shares.
  • LLCs can express ownership as units or percentages, giving flexibility in profit distribution and voting rights.
  • Members may have different classes of units, allowing distinctions in voting power or profit allocation.
  • Issuing and tracking LLC units requires accurate recordkeeping and compliance with state laws and the LLC’s operating agreement.
  • LLC membership interests can sometimes be used as collateral for loans, but this involves legal complexities and creditor restrictions.
  • Delaware LLCs offer flexibility in structuring and transferring ownership units, making them a popular choice for investors.

LLC units refer to the amount of the company each member owns. The ownership interest in a limited liability company (LLC) is expressed one of two ways:

  • By membership units, which are like stock shares of a corporation
  • By percentage

Regardless of how the LLC chooses to assign ownership interest, both ways grant the members the right to share in the business profits and vote regarding business matters.

Ownership Percentages

An LLC has the option to distribute ownership interest however the members wish. This is one feature that sets an LLC apart from a corporation. Corporations are required to distribute ownership interest based on the amount of property or money each shareholder contributes. Limited liability companies are not bound by the same rules. 

For example, say John contributed $10,000 to an LLC and Richard contributed $1,000 but handles more of the managerial duties of the business. They could choose to split the LLC's membership interests 50-50 so each has an equal share.

Limited liability companies can also be organized with differing ownership interest classes. This provides more flexibility to allocate voting power and profit shares. An LLC might create a unique class for additional voting power. This would allow each unit to have additional votes or receive a certain portion of the profits before those who don't fall under the special voting class.

The sale of membership interests in an LLC must comply with state and federal laws around securities. However, if the LLC is dealing with a small group of investors, generally fewer than 35, and isn't advertising the sale of membership interest, it might be exempt from most of these regulations. When an LLC is raising a large amount of funds from more than 35 investors, it is best to consult with a business or tax attorney. 

Classes and Types of LLC Units

An LLC can divide ownership into different classes of membership units to tailor how profits, losses, and voting rights are distributed. Common examples include:

  • Class A units: Typically held by founders or managing members, with full voting rights and higher profit participation.
  • Class B units: Often issued to passive investors or employees, providing limited or no voting rights but a share in profits.
  • Preferred units: Grant priority for profit distributions or liquidation proceeds before other classes receive returns.

This multi-class structure allows LLCs to attract investors or reward employees while maintaining managerial control. The operating agreement should clearly define the rights and obligations tied to each class of LLC units.

How Do We Issue LLC Membership Interests? 

To issue LLC membership interests properly, members should complete several important tasks:

  1. First, outline and specify membership interests in the signed operating agreement. These interests can be outlined as percentages or units. 
  2. Second, make sure to specify considerations for payment of membership interest in the LLC in the operating agreement. In most cases, the consideration is cash, but other options include the provision of services or transfer of assets. State laws can affect what options are legal.
  3. The third task is maintaining written evidence that each member paid the consideration specified in the operating agreement. If the consideration was made in cash, the LLC should keep a record of that amount when it was deposited into the business account. If the consideration was not cash, the LLC should keep written documentation that outlines the agreement between the business and the member. The agreement should outline what the member is obligated to provide or has provided for the specific consideration. 

An LLC must maintain a book of records to hold all important paperwork and documents. Some of the most important documents include:

  • The operating agreement
  • The document of organization that was filed with the Secretary of State to form the LLC

Additional documents relating to LLC membership interests include:

  • A balance sheet with a capital account for each member. This should include the member's initial capital contribution and any subsequent decreases or increases, based on distributions and allocations.
  • Ledger outlining transfers of membership and certificates of membership, with evidence of current membership interests.

Legal and Tax Considerations When Issuing LLC Units

When issuing LLC units, it’s important to comply with state and federal securities laws, as membership units may qualify as securities under certain circumstances. Although most small LLCs are exempt from registration when offering units to a limited number of investors, proper disclosure and documentation remain essential.

From a tax standpoint:

  • The IRS does not recognize LLC units as stock, but rather as ownership interests in a partnership for tax purposes.
  • Members are typically taxed based on their ownership percentage of profits and losses, regardless of whether distributions are made.
  • Some LLCs issue profits interests—units that entitle members only to future gains and not existing capital, useful for compensating employees or advisors without immediate tax consequences.

Properly structuring unit issuance can help avoid disputes and ensure compliance with both tax and securities regulations.

Avoiding “Alter Ego” Problems

Keep careful track of how membership interests in an LLC are issued and distributed. An issue that can arise when the distribution isn't handled properly is an alter-ego analysis. This can void the benefit of limited personal liability. When forming an LLC, it's critical to issue the company's membership interests in accordance with legal regulations.

Using LLC Units as Collateral

LLC membership units can be pledged as collateral for loans or financing. This allows members to leverage their ownership interest to secure credit. However, this practice is complex and subject to restrictions:

  • Operating agreement restrictions: Many agreements limit or prohibit members from transferring or pledging their interests without consent.
  • Creditor rights: Even if a lender obtains a security interest, they typically receive only an economic interest—the right to profits or distributions, not management control.
  • State law compliance: The Uniform Commercial Code (UCC) governs how membership units are perfected as collateral through a UCC-1 financing statement.

Members should consult an attorney before using LLC units as collateral to ensure proper documentation and compliance with applicable laws.

Delaware LLC Ownership: Units

Forming an LLC in Delaware is very appealing to entrepreneurs across the globe. This state's laws are some of the easiest to comply with and maintain, offering more flexibility to LLC members. In fact, Delaware is one of the country's most business-friendly states. Some people refer to it as the incorporation capital because it's home to the Court of Chancery and has a strong structure for corporate laws.

Transferring and Valuing LLC Units in Delaware

Delaware’s LLC Act offers significant flexibility in transferring and valuing LLC units. Unlike corporations, Delaware LLCs can design unique procedures in their operating agreements for selling, transferring, or redeeming units. Key considerations include:

  • Transfer approvals: Transfers may require the consent of other members or managers to prevent unwanted changes in ownership.
  • Valuation methods: LLC units are often valued based on capital contributions, fair market value, or appraisal formulas defined in the operating agreement.
  • Buy-sell provisions: These clauses outline what happens to a member’s units in events such as death, withdrawal, or dispute—helping avoid future legal conflicts.

Because Delaware law gives wide contractual freedom, members can customize how their LLC units are issued, transferred, or valued—offering flexibility that many investors find appealing.

Frequently Asked Questions

1. What are LLC units?

LLC units represent ownership in a limited liability company, similar to shares in a corporation. They define each member’s rights to profits, losses, and voting power.

2. How do LLC units differ from ownership percentages?

Units quantify ownership like shares, while percentages express ownership proportionally. For example, 100 units could equal 1% ownership per unit.

3. Can LLCs issue multiple classes of units?

Yes. LLCs may issue different classes—such as Class A or Class B units—with distinct voting rights or profit allocations, as defined in the operating agreement.

4. Are LLC units taxable?

Members are taxed on their share of profits or losses based on their ownership interest. LLCs themselves are generally pass-through entities, meaning profits are reported on individual tax returns.

5. Can LLC units be transferred or sold?

Yes, but transfers typically require approval per the operating agreement. Some states, such as Delaware, allow broad flexibility in designing transfer rules for LLC units.

If you need help with LLC units, 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.