Can LLC issue stock?
Do you have shareholders in an LLC?
Can a limited liability company issue stocks or different classes of shares?
We will look at questions like “does an LLC have shares”, can LLC shares be traded, are LLCs publicly traded, is the corporation’s process of issuing shares equivalent to issuing shares of LLC, LLC shareholders, LLC units and more.
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Do LLCs have stock
A question that seems to be asked a lot is can an LLC issue shares or can a limited liability company issue stock?
The simple answer to this question is no!
There is no such thing as an LLC stock or LLC shareholders (borrowing the terms from the corporation regime).
Instead, LLCs have membership interests (instead of shares) owned by members (instead of shareholders).
Membership interests provide LLC members with:
- The right to receive a portion of the company’s earnings or profits
- The ability to flow down losses, deduction and credits to the individual members
- Have a voice in the management of the business
A limited liability company is designed to be privately owned and have a private ownership structure.
As a result, it cannot issue stocks or equity securities to its owners in the same way corporations can.
However, LLCs can issue debt securities such as bonds or debentures although the process may be more complicated than issuing stocks as you need to deal with specialized firms or investment bankers.
Do you have LLC classes of stock
You cannot issue different stock classes in an LLC as LLCs cannot issue stocks or shares in the first place.
Corporations can issue different classes of stock to different classes of shareholders such as common stock or preferred stock.
Common shares will typically be issued to the company founders and those who have voting rights.
When issuing preferred shares, a corporation may grant preferred rights to the shareholders such as rights to receive dividends or preferred distribution (before common shareholders) in a winding down of the business.
However, limited liability companies may grant certain preferential rights to its members in its operating agreement such as:
- Provide greater interest to a member in the context of asset liquidation
- Allocate a higher level of income or profits to members (known as a special allocation subject to IRS approval)
Can an LLC go public
Typically, a limited liability company cannot go public as it cannot issue shares and sell equity ownership rights in the form of marketable securities.
As such, its ownership or equity stake cannot be publicly traded.
However, in some specific cases, an LLC can be designed to have units traded on the stock exchange.
Due to the LLC’s very flexible nature, you may be able to structure it as a publicly traded partnership (PTP) and have units trade on the securities exchange.
To be able to trade publicly, the LLC must:
- Provide for the ability to transfer, assign and sell ownership rights in the LLC operating agreement
- Elect to be taxed as a partnership
- Structure the LLC as a publicly traded partnership or PTP
Many organizations in the energy and natural resources tend to trade publicly by issuing units on the stock exchange.
The issue of LLC units is like an LLC issue of shares where the units represent LLC equity or ownership.
It’s also worth noting that privately held LLC may sell membership interests to third parties to raise capital for the business in some cases.
In such exceptional cases, an LLC member may sell an interest in the LLC to family members, friends or individuals close to the member.
In this case, the third party may acquire an interest in the LLC but will not have the right to participate in the business.
Membership interest vs LLC stock
Limited liability companies are referred to as a “company” and not a “corporation”.
Since they are not a corporation, there are no LLC stocks or LLC shares to be issued to the LLC owners.
Where a corporation (like a C Corporation or an S Corporation) can issue stocks representing a residual claim on the company’s profits and assets, an LLC has membership interests as defined in its partnership agreement.
LLC membership interests provide the LLC members with the ability to participate in the business operations and make decisions regarding how profits will be distributed between them and asset entitlements.
Typically, the member rights cannot be sold or transferred to third parties to the LLC.
In exceptional cases, third parties may purchase a member’s financial interests but will not have the right to participate in the business.
LLC members may assign or delegate their LLC management rights in accordance with the terms of their operating agreement.
Unlike corporations that are bound to comply with many laws, an LLC organization has greater flexibility in defining the rights and obligations of its members in its operating agreement.
An LLC operating agreement can govern the following membership interests:
- Delegation of powers to managers and officers
- Voting rights on various company actions
- Capital contribution obligations
- Profit distribution
- Transfer of membership interests
- Transfer of membership interests in the event of death
- Dissolution rights
LLC member vs LLC shareholder
An LLC is owned by its members either as a single member LLC or a multi member LLC.
The members are not considered shareholders of the LLC as an LLC does not have shares or shareholders.
Unlike corporations, an LLC does not issue stock to reflect a percentage of ownership in the corporation.
In the course of the company’s business operations, it is possible for new members to join the LLC and active members to leave the company.
To own an interest in an LLC, a member must acquire LLC interests in accordance with the terms of its operating agreement.
Although limited liability companies are governed by state laws, there are some commonalities that we generally see with regards to the LLC ownership structure:
- LLC members typically have the same rights
- LLC members own interest in the company based on their investment in the company
Since an LLC does not issue stocks, it does not issue a stock certificate either to its members.
By signing an operating agreement, the LLC members become bound by a legally binding contract setting out the LLC’s internal rules.
Nonetheless, LLCs who wish to issue a document similar to a stock certificate have the option of issuing a “membership certificate” recognizing a member’s interest in the LLC.
The membership certificate will include information such as:
- LLC name
- LLC state of formation
- LLC membership units
- LLC member’s name
The LLC must devise a process where the member interests are translated into a certain number of units to be reflected on the membership certificate.
LLC taxes
Another important nuance between LLCs and corporations are with regards to the applicable taxes.
LLCs are formed under state laws.
As such, the Internal Revenue Services (IRS) provides limited liability companies with flexible taxation regimes.
An LLC can choose to be taxed either like a partnership or a corporation.
Depending on the tax structure you may want to be applied to your LLC, you will consequently need to structure the LLC ownership either like a partnership, a C Corporation or an S Corporation.
The LLC provides more flexibility from a tax point of view as it can choose to have pass-through taxation where the business earnings are taxed in the hands of the members in proportion to the profits they received or decide to have the entity pay its own corporate income taxes.
Frequently asked questions
What is a stock in an LLC called
An LLC does not have shares or stock.
Instead, the LLC owners (or members) have a membership interest in the company.
Membership interests grant the LLC member the right to participate in business decisions and to receive a portion of the LLC business earnings.
A membership interest is not like stocks or shares that are transferable or marketable.
Membership interests are based on the legal rights and obligations stemming from the execution of the LLC operating agreement by an individual member.
Can LLC issue stock options
LLCs do not offer stock options like corporations.
Corporations have the ability to issue shares or part ownership to third parties such as employees, investors or others.
On the other hand, LLCs cannot issue stock options, implement employee stock purchase plans (ESOP), issue restricted stock, or provide LLC ownership to others.
LLCs, by their nature, are designed to be privately owned business structures operated by its members.
As a result, the members’ rights and obligations, including the rights to transfer and assign membership interests, are called out in the LLC operating agreement.
An LLC can reward its employees but that’s the scope of another article!
Can LLC have different classes stock
An LLC does not issue stocks to its owners and, as a result, it does not have different classes of stock either.
Unlike corporations who can define different categories of stocks like common shares, preferred shares or others, an LLC cannot allocate its ownership through equity securities.
Instead, LLC ownership interest is held by individuals granted membership rights in the business granting them the right to participate in the business and share the LLC earnings.
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