A limited liability company (LLC) is a business entity that offers a number of benefits for entrepreneurs, small business owners, startups, and existing companies. Forming an LLC may be a good option for solopreneurs who have decided sole proprietorship is too risky. An LLC structure offers protection to business owners by helping to keep business assets and debts separate from personal property and finances.
Do LLCs have stock?
Entrepreneurs considering this business structure may wonder: can an LLC issue stock? The short answer: Limited liability companies (LLCs) do not have stock, nor can they issue stock.
While corporations that issue stock have corporate shareholders or stockholders, LLCs have membership interests, sometimes referred to as membership units, that confer an ownership stake on members. LLC membership interests may include either financial rights, governance rights, or both, and these rights may vary by member.
In some cases, LLC members may get membership certificates that spell out the details of their membership units, ownership stake, and rights.
Despite not issuing stock, LLCs may have advantages over corporations, depending on your particular business needs and goals. For example, LLCs can help you avoid double taxation because LLCs do not pay corporate taxes unless the LLC members decide they want the business to be taxed as a corporation. In that case, the LLC itself must file a separate corporate tax return and pay taxes on its taxable income.
Can an LLC have two classes of stock?
Only businesses structured as corporations can issue stock. Businesses structured as limited liability companies cannot issue stock, so LLCs do not have two classes of stock. In fact, LLC stock of any class does not exist.
In contrast, corporations typically have two classes of stock, common stock and preferred stock. Common stock is a standardized stock that is bought and sold on stock markets and does not guarantee dividends. Preferred stock is not standardized and has some advantages over common stock, such as priority for these shareholders to get paid if the company liquidates.
LLC vs. corporate entity
Compared to a corporation, a limited liability company structure offers entrepreneurs a number of benefits that often make them an attractive choice. For example, LLCs are typically more flexible than corporations, are less expensive to start, and require less paperwork, both initially and over time. LLC owners are called members, and the company can have one or more LLC members with membership interests.
These features can be enticing for startups, so if you're in this position and are wondering about LLC stock, it's important to consider the reasons behind wanting a business structure that can issue stock. You may find that you'll be able to accomplish your particular goals through an LLC rather than a corporation.
If you decide to form a limited liability company, despite its inability to issue LLC stock, you'll need to set out the details of your LLC and its membership interests in an operating agreement. This will help you set ground rules, protect your assets, and avoid misunderstandings among LLC members if there is more than one.
Advantages of stock for raising funds
A corporation's ability to issue stock gives it a big advantage when it comes to raising capital. For both institutional investors and individual investors, investing in the shares of a corporation is usually a far better option than investing money in an LLC.
For institutional investors, in particular, investments in LLCs are trickier from a tax perspective, as LLCs are flow-through entities when it comes to taxes. This means income generated by the LLC flows through the LLC to be taxed in the hands of LLC members, which can have potentially negative consequences for the institutional investor's tax situation.
However, the same may not hold true for the individual, or angel, investor. While stocks provide an efficient method of investing in a business, individual investors are more likely to take a more flexible, personal approach to evaluating investment opportunities. For such investors, the inability to invest through the purchase of shares may be a negative, but other factors may be sufficient to make investment in an LLC attractive.
In many cases, if your goal is to raise capital through institutional investors, the corporate structure will likely make more sense. However, if you intend to primarily pursue individual or angel investors, an LLC could still be a viable business structure.
LLC ownership interests and stock
Shares also offer an efficient way to provide multiple individuals with ownership interests since shares are essentially ownership units in a company. But if you've been thinking about forming a corporation because you plan on having multiple owners, an LLC may be a viable option even though LLCs can't issue shares.
While many LLCs have just one member, you also can form multi member LLCs, which offer the same benefits and features as single-member LLCs. For example, members of a multi-member LLC have the same limited liability protection offered by a single-member LLC, and they have voting rights. In a multi-member LLC, each member may get an LLC membership certificate as proof of their ownership stake in the organization. And in a multi-member LLC, LLC profits are split based on ownership percentage.
The primary difference between single-member and multi-member LLCs is how they are taxed by the Internal Revenue Service (IRS). While both are considered flow-through entities, the IRS treats the single-member LLC as a disregarded entity, while multi-member LLCs are taxed as partnerships. This means the activities of a single-member LLC will likely be reflected on the owner's personal tax returns, and the owner will have to pay self-employment taxes on their business profits.
Although theoretically, there's no real limit to the number of LLC members you can have in a multi-member limited liability company, each member's interest in the LLC should be set out in the LLC's operating agreement. From a practical perspective, then, if a large number of people will hold ownership interests in your startup, a corporation may be a better choice despite having less flexibility and more costs and filing requirements.
An LLC may be managed by a manager or by its members. In a member-managed LLC, the members may be involved in the LLC's day-to-day operations.
LLC operating agreements
A limited liability company operating agreement spells out the LLC's rules, regulations, and processes. LLC operating agreements serve several purposes, including:
- Offering protection from personal liability by spelling out the LLC structure that protects members' personal assets from business liability.
- Preventing misunderstandings and miscommunications by clearly setting forth members' agreements in writing.
- Helping to ensure that an LLC is operating by the rules the members have set forth rather than the default rules for LLCs set by the state where the entity was formed.
An LLC's operating agreement will be unique to that business and may spell out how the LLC will be managed, how its assets will be handled, and how duties will be divided amongst members.
Long-term objectives and limited liability companies
One important consideration in choosing between a corporation and an LLC is your ultimate goal for your new business. For example, if your goal is to grow your business rapidly in order to attract potential buyers for a big buyout, or you want to eventually take your business public through an initial public offering (IPO), a corporation may be the better structure for your company.
While you can always change an LLC to a corporation in the future, additional costs are associated with this change, so starting out as a corporation might be your best option.
On the other hand, if your plan is to continue running your business for the long term, you may not need the ease of transfer of ownership that stocks provide. In such cases, the benefits of running your company as an LLC may outweigh the disadvantages of not being able to issue stock.
Limited liability company S corp or C corp election
You may have also wondered about the LLC's ability to select S corporation or C corporation status. It's important to understand that the election of such status is from a tax perspective only. If you elect to be taxed as either an S corp or C corp, this election doesn't affect the legal structure of the LLC.
Because IRS terminology refers to shareholders of an S corp or C corp, it can be confusing. But for LLCs, this reference to shareholders simply means the members of the LLC. Electing to be taxed as an S corp or C corp doesn't result in your LLC gaining the ability to issue shares of stock.
Do LLCs have stock certificates?
Stock certificates are documents issued by a corporation to the shareholders to provide evidence of stock ownership. Because LLCs cannot issue stock, LLCs do not have stock certificates.
Can LLCs have treasury stock?
Treasury stock is stock that has been put back into the hands of a corporation by purchase or donation but has not been canceled, retired, or returned to unissued share status. LLCs do not have or issue stock, so LLCs cannot have treasury stock.
Is the owner responsible for LLC debt if the company fails?
The members of an LLC generally are not personally liable for the LLC's debt. There are exceptions, though, sometimes known as "piercing the corporate veil." This may happen if there is fraud or if a member fails to follow proper business practices, such as mingling business and personal finances.
What is the Delaware LLC Act?
Each state sets out rules for LLCs formed within its borders. The Delaware LLC Act states that members and managers are not personally liable for debts, obligations, or liabilities of the LLC solely due to their status as members or managers of the LLC.
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