Do LLCs Have Stock?

LLC ownership structure

LLCs typically issue membership certificates to document each member's ownership stake and rights, but membership units also need to be legally documented in an LLC’s operating agreement. These certificates specify the member's percentage of ownership, voting rights, and profit-sharing arrangements. Unlike stock certificates, membership certificates cannot be traded on public markets and often include restrictions on transfer to maintain the LLC's closely-held nature.

For example, a three-member LLC might allocate ownership as follows: Member A holds 50% membership interest, Member B holds 30%, and Member C holds 20%. Each member's rights and responsibilities would be detailed in the LLC operating agreement, including how profits are distributed and major decisions are made.

Can an LLC issue stock or become publicly traded?

LLCs cannot issue stock or be publicly traded in their current form, but they can switch to corporations if public trading or stock issuance becomes the best move for business growth. This conversion process allows businesses that were initially registered as LLCs to access public capital markets (like the NASDAQ or NYSE).

How to convert an LLC to a corporation

To issue stock for fundraising or public trading, you first need to switch to a corporate business structure. You can convert to a corporation through the following steps:

1. Review your operating agreement to ensure that all members consent to the conversion and understand the tax implications of changing business structures.
2. Choose your corporation type by deciding between C corporation (for public trading) or S corporation (for tax advantages with ownership restrictions).
3. Determine which conversion process your state allows, as some states allow statutory conversions, where the LLC’s assets and liabilities transfer seamlessly between business entity types, and others only allow statutory mergers, which require the formation of a new corporation before the official merger process can begin.
4. File the necessary documents, which may include a certificate/statement of conversion, articles of incorporation, or certificate of merger with your state's Secretary of State office or relevant state agency, including details about authorized shares and corporate structure. Once the paperwork is filed and approved, your LLC’s business assets and liabilities will be transferred to the new corporation, which may trigger tax consequences that require professional guidance to minimize.
5. Pay the required fees to the relevant state agency. Fees vary by state.
6. Issue stock certificates to former LLC owners based on their previous ownership interests and any new investment arrangements.
7. Dissolve the LLC if you took the statutory merger route, and file the appropriate paperwork (usually a certificate of dissolution) with your state agency.

Why businesses convert from LLC to corporation

The primary reasons LLCs convert to corporations include accessing institutional investors who prefer corporate stock, preparing for an initial public offering (IPO), and creating employee stock option plans. Corporations also provide more standardized structures that sophisticated investors understand, making fundraising easier for rapidly growing businesses.

However, conversion involves trade-offs including potential double taxation, increased regulatory requirements, and less operational flexibility. Many successful companies continue operating as LLCs because the benefits outweigh the limitations for their specific business models.

Structuring LLC ownership and attracting investors

Creating an effective LLC ownership structure requires careful planning to balance member interests, operational needs, and potential investor requirements. The key to successful limited liability company ownership lies in drafting a comprehensive operating agreement that clearly defines each member's rights, responsibilities, and economic interests. This document serves as the foundation for all ownership-related decisions and helps prevent disputes as the business grows.

Even single-member LLCs should have an operating agreement.

Steps to structure LLC ownership

1. Determine membership interest percentages based on each member's capital contribution, sweat equity, or ongoing responsibilities to the business.
2. Define voting rights by deciding whether voting power matches ownership percentages or if certain members have enhanced voting rights for specific decisions.
3. Establish profit and loss allocation rules that may differ from ownership percentages to reflect each member's contribution and risk level.
4. Create the management structure by choosing between member-managed LLC (all owners participate) or manager-managed LLC (designated individuals, who aren’t necessarily members, handle operations).
5. Draft transfer restrictions to control how membership interests can be sold or transferred.
6. Document everything in the operating agreement with clear language that addresses potential conflicts and details the process for dispute resolution.
7. Issue LLC membership certificates to formalize each member's ownership stake and provide official documentation of their membership interest in the limited liability company.

Attracting investors to your LLC

Many investors prefer investing in corporations for their high-oversight structure and familiar legal framework, as well as for federal income tax purposes, as LLCs can complicate personal taxes if they are structured as pass-through entities. Additionally, venture capital firms may not even be able to invest in LLCs because they have tax-exempt investors.

However, this doesn’t mean that it’s impossible to attract investors to your LLC. In addition to the business structure's protection from personal liability, some investors also find LLCs attractive because of their flexible tax structures and management structure.

When presenting your limited liability company to potential investors, emphasize the flexibility in profit distribution, the ability to provide different classes of ownership interests with varying rights, and the reduced regulatory burden compared to corporations. 

Many successful LLCs have attracted significant investment by structuring creative membership arrangements that give investors preferred profit allocations or enhanced voting rights on specific matters.

But if your business model requires institutional investment or venture capital funding, you may need to consider converting to a corporation.

How LegalZoom can help with LLC and corporation formation

Starting a business is one of the most important decisions you’ll make. The choice between a limited liability company and corporation depends on your specific business goals, funding needs, and growth plans. If you need to raise capital from institutional investors or plan to go public, a corporation's ability to issue stock provides significant advantages. However, if you prefer pass-through taxation, operational flexibility, and simpler compliance requirements, an LLC's membership structure may better serve your needs. 

Whichever business structure you choose, LegalZoom makes the business formation process simple and affordable. Our experienced team can help you form your LLC, S corporation, or C corporation and draft the necessary documentation. Plus, we provide ongoing support as your business grows, with the tools and expertise to help you succeed.