Do LLCs Have Shares? (Everything You Should Know) (2024)

Limited Liability Companies (LLC) are organized differently than all other types of corporations in the sense that, like a partnership or sole proprietor, it does not issue stock.

Instead of selling shares to investors (like in an initial public offering), owners sell pieces of their business interest directly to others.

As a seasoned business consultant with years of experience helping entrepreneurs, I recognized the importance of shares in limited liability companies. My research involved analyzing state statutes, legal precedents, and expert opinions on LLC ownership.

In this comprehensive article, I aim to explain LLC ownership and whether LLCs issue shares.

Quick Summary

• LLCs do not have shares; instead, they have interests called "membership interests" or "units."
• Membership interests represent the ownership stake of individuals or entities in the LLC, and ownership is determined by the percentage of units each member holds.
• Unlike shares of stock, membership units in an LLC do not have the same transferability or market value associated with publicly traded companies.

LLCs do not have shares. Unlike corporations, which issue shares of stock to represent ownership interests, LLCs operate differently [1].

Instead of shares, LLC members have interests referred to as 'membership interests' or 'units.' These units represent the ownership stake of individuals or entities in the multi-member LLC.

Each member's ownership is determined by the percentage of units they hold, typically outlined in an operating agreement.

Unlike shares of stock, membership units do not have the same transferability or market value associated with publicly traded companies.

LLCs provide a flexible and more straightforward structure for organizing a business, allowing members to have a stake in business profits and losses without the complexities of a traditional stock-based ownership system.

LLC Structure vs Corporate Structure

A multi-member LLC structure is not the same as a corporation's, and many people confuse the two or think that they are interchangeable.

An LLC does not issue stock; rather, owners receive interests in proportion to their capital contribution to the company (the amount of money they put in and pay upfront). Corporations on the other hand can issue stock.

LLC membership units and traditional corporate shares are both forms of ownership in business entities although they have distinct characteristics and implications.

The membership units of an LLC represent ownership interests in the business entity. The investment or business ownership percentage dictates how the units are allocated to LLC members and grants them certain rights and privileges within the company.

The main purpose of LLCs is to provide the same level of personal liability protection that comes from a corporation's capital structure, but without limiting tax flexibility as corporations do.

A big advantage LLCs have over corporations is that they are completely free from double taxation, which can be a problem when sharing profits and losses in a corporation. Rather the profits and losses are filed on personal tax returns.

LLCs do not pay corporate taxes on the company's income every year, but instead, pass-through taxable income or loss to each member annually.

S Corporations and C Corporations, both of which are types of corporations, allow taxation at the shareholder level. An S Corporation and C Corporation do not, however, provide the same liability protection that LLCs can.

S Corp shareholders are generally only liable for what they invest in the S Corporation (known as capital contributions), and S Corporation debt cannot be guaranteed by individual S Corporation shareholders like limited liability members.

Corporate shareholders also have less flexibility in structuring their companies. S Corporations and C Corporations are both required to have a board of directors, which S Corp shareholders can only vote for.

A limited liability company is not formed by filing papers with the state. Instead, the business organizers create and sign articles of organization and file them by submitting a form to their Secretary of State (or equivalent) office.

The basic characteristics and components of business ownership structures, which are also mentioned in an LLC operating agreement include:

• Purpose of the Company
• LLC Ownership Structure
• Business Debts and Liabilities of the Company
• Membership Interests
• Responsibilities and Duties of The LLC Members

A few exceptions exist where businesses are required by law to use a specific business structure, such as if it's a financial institution. In those cases, the company must use federally approved business structures.

LLC Members

LLC owners are the members and managers of an LLC that have certain rights and responsibilities.

The members cannot be held personally liable for the debts or obligations of the limited liability company, but they may still be taxed on business income even if not distributed to them by the company.

They also can participate in management decisions such as selecting new members and managers. Members manage the business casually, but this is not required of them.

LLC Membership Interest

LLC shares are also called membership interests. They are intangible, just like stock in a corporation.

Ownership is represented by membership certificates which are issued to the owners when they buy into the company.

These membership certificates do not represent any share of ownership in the LLC itself, rather they simply indicate the owner's interest.

Ownership in an LLC is represented by percentages, not the number of membership certificates.

LLC shares are generally not considered an asset that can be sold or traded. Members' membership percentages do represent the amount of ownership they have in the business and can change over time if the shares get bought out or changed by vote.

They are membership rights in the membership-managed LLC, and membership certificates simply represent membership interests.

It also determines each owner's voting rights just as proportional ownership determines their share of profits/losses.

The way to issue shares in a Limited Liability Company is to contribute capital. This is done simply by transferring money or property to the company.

There is also an operating agreement, which is like a shareholder’s agreement between the members.

Some states do not permit an LLC to have multiple classes of LLC shares, which means all members have equal rights unless otherwise specified in the operating agreement.

The company can issue different classes of LLC shares if authorized by the state it operates. This allows more than one class of membership interests with different economic or voting rights.

While it is not required that all LLCs have operating agreements, they are strongly recommended by business experts because the law outlining what an LLC can do is relatively brief compared to corporations and partnerships.

Read our article for more information on how to capitalize an LLC.

Here are five factors that should be considered when dealing with LLC shares:

Different Rights

Even if all members have an equal percentage interest in the company, they are not necessarily entitled to receive the same distribution of profit. It is very much possible for one member to earn far more than their fellow members.

Different Roles

The members may contribute different amounts to the business depending on what sort of role they will play in the company.

One may provide capital while another takes on a management role in the company.

Distribution Of Profit

Members are each entitled to claim business profits in proportion to the percentage of ownership that they hold (which is not necessarily linked to how much money was invested).

The members are also entitled to buy or sell their shares in the company. Another member for profit may buy these out, sell them to another person interested in investing in the company, or exchange them between existing shareholders to settle the debt.

LLC Dissolution And Liquidation

The company will have the option of being liquidated, which means it can be dissolved, and all its business assets can be sold to repay outstanding debts.

The money raised from this sale must pay off any creditor claims before being divided among the members to their percentage interest in the LLC.

FAQs

Can LLCs Issue Stock

LLCs do not issue stocks, but they do issue shares. These shares are not just like those in a corporation, which have shares of stock that can be bought and sold, LLCs have ownership interests known as "membership interests."

Shares do not represent these interests. However, in some cases, LLCs may be able to issue membership units similar to shares but with different rights and characteristics.

It's important to consult with professional online legal services to understand your jurisdiction's specific regulations and requirements. It ensures you're compliant when dealing with your personal assets and filing personal tax returns.

References:

1. https://www.beankinney.com/ownership-interests-in-an-llc-the-options-are-endless/