It is possible for an LLC to issue something similar to stock, called membership units. Just like stocks, membership units divide up the ownership of the company amongst the owners of the units, allow the owners to vote for the directors of the company, and give them rights to share in the profits. LLCs can also create different classes of membership units, just like corporations can with their stocks. (Think common stock verses preferred stock). But unlike corporations, LLCs can also be formed to express ownership as a percentage basis like a partnership.
I work with a lot of small business owners and I am always surprised by the strange information and advice they get related to LLCs. If you are planning to start or invest in an LLC, you will want to consult an attorney in your state familiar with the LLC laws and consult a good financial advisor familiar with small businesses.
LLC Flexibility Causes Confusion & Bad Advice
There is a lot of confusion about the LLC structure, and you may hear inaccurate information, even from reputable sources. This is partially due to the fact that LLCs are created by state law, and the details may differ from state to state. The fact they are created by state law also leadsthe IRS to allowan LLC to choose how they want to be taxed, either as a pass-through entity, a partnership, or as a C-corporation with double taxation. All this flexibility allows an LLC to structure itself like a partnership, a C-corporation, or an S-corporation; giving the owners the ability to make the business fit their specific needs.
The Downsides of the LLC
While the LLC opens up a lot of flexibility, there is also potential downsides to its formation. An LLC may increase taxation verses a C-Corporation due to how the tax code treats things like Fringe Benefits for owners and other aspects of owner compensation/profit. And many advanced tax and financial planning techniques won’t work under the LLC structure. Additionally, some states limit or eliminate the liability protection for single member (single owner) LLCs or may have other state laws which drastically change the benefits of an LLC or create new challenges.
Investors Beware the LLC Investment Opportunities
Investors should be especially careful of LLC investments because they are not easy to sell, are not regulated by the SEC, and do not provide the same protections and disclosure requirements as publicly traded companies. Financial advisors who push these investments may be offering advice based primarily on a big fat commission check they can earn by getting an investor to invest. Seek a fee-only and fiduciary financial advisor to give you an unbiased opinion of the investment.
