Shares in an LLC: Everything You Need to Know
Issuing shares in LLC can be a great option for owners who are looking to raise funds or gain investors, Some LLC owners may want to issue stock to raise money.3 min read
Issuing shares in an LLC can be a great option for business owners who are looking to raise funds or gain investors. Although some LLC owners may want to issue stock to raise money, only corporations are legally allowed to spread out ownership in small amounts by selling stock. Although LLCs are allowed to file their taxes as corporations, they aren't allowed to issue stock.
Stocks and LLCs
Each share of a corporation's stock is worth a small portion of the company, which means that altogether, shareholders own the company. In most cases, corporation owners hold on to at least half of their shares to avoid outside investors taking over the company. Investors purchase stock to have partial ownership of a company, and the corporation can then use that money to develop new products, hire more employees, expand into new areas, and continue to grow and run the business.
LLCs, or limited liability companies, are popular entities for small business owners because they offer management flexibility without overwhelming regulations. Unlike a corporation, an LLC does not have to have a board of directors, which leaves LLC owners free to decide how their company will be organized and managed. However, one downside is that LLCs are not allowed to issue stock. State regulations for LLCs differ slightly, but no state allows LLCs to sell stock. That right is reserved for corporations, both C-corps and S-corps.
However, LLCs aren't prohibited from issuing debt instruments like bonds. Issuing bonds to an LLC gains financing for the company, just the same as issuing stock does for a corporation, but it is much more complicated to issue bonds than it is to issue stock. In order to be successful, an LLC may need to consult an investment bank or a firm that specializes in debt instruments.
Ownership Structure of LLCs
Ownership in an LLC can be broken down in two ways:
- Membership units
No matter how it is expressed, LLC ownership always includes the right to vote and a share of the profits. One of the major differences between ownership in a corporation versus an LLC is that an LLC doesn't have to distribute ownership according to how much money a member gives to the company. Instead, the LLC can spread ownership interests however it wants.
For example, if one member contributes $15,000 but isn't involved with the company at all and another member doesn't contribute any money but runs the company's day-to-day operations, the membership interests could still be split evenly between the two members if they both agree.
LLCs can also have different classes or levels of ownership interests for added flexibility in allocating voting power and profit distribution. For example, a company could choose to create a special class of ownership that allows a member to vote 10 times per unit or receive a certain portion of the profits before other types of units.
Corporations can choose if they want to issue preferred or common shares. In most cases, preferred stock comes with dividend preference and the first chance to gain company assets in the case of liquidation, as well as special voting rights.
An LLC can't issue preferred shares because it can't issue stock. However, there are still ways to give special benefits and rights only to certain LLC members, as long as it is stated in the LLC operating agreement. The operating agreement can state that a particular member has the power to veto issues that require a vote from all LLC members, for example.
Membership interests must be sold according to state and federal securities laws. However, if you are working with fewer than 35 investors and aren't advertising the sale, you will be clear from the majority of the regulations. You should consult an attorney if you are looking to raise a large amount of money from a large pool of investors.
LLC statutes and regulations tend to vary slightly by state, but one commonality across all states is that LLC members must be given equal rights. LLC members are typically given ownership stake according to their level of investment in the company.
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