Can an LLC Offer Both Preferred and Common Shares?

By Larissa Bodniowycz

Can an LLC Offer Both Preferred and Common Shares?

By Larissa Bodniowycz

A limited liability company (LLC) cannot offer preferred or common shares because LLCs do not sell or have shares. An LLC can, however, employ other strategies to create a tiered ownership structure similar to that of common and preferred shares in a corporation.

Membership Interests vs. Shares

Unlike corporations, LLCs do not and cannot have shares. LLCs are owned by one or more members. LLC members can be people or other business entities. Each member owns a membership interest in the LLC expressed as a percentage or units of membership.

For example, the breakdown of ownership in a four-member LLC could look like this:

  • Mary Jones, 40 units
  • Bob Smith, 20 units
  • Carl Adams, 20 units
  • Jane Murray, 20 units

Or like this:

  • Mary Jones, 40%
  • Bob Smith, 20%
  • Carl Adams, 20%
  • Jane Murray, 20%

The effect is the same. In both, Mary owns 40 percent of the LLC, and the other three owners own 20 percent each. Small LLCs usually track membership interests on a membership schedule, a list of the members and their ownership percentages or units, attached to an operating agreement. Some larger LLCs create certificates, similar to stock certificates, that serve as proof of ownership of a certain number of LLC units.

Tiered Ownership Options

Corporations use common and preferred shares to offer different types of ownership. Usually owners of preferred shares do not have voting powers but have priority when distributions go out and receive a larger amount of distribution per share owned. Common share owners, in contrast, usually have voting power but don't receive dividends until after preferred shareholders, and they receive less per share than preferred shareholders.

Even though LLCs cannot offer shares, they can set up a structure analogous to the common and preferred share system used by corporations. For this type of structure, LLCs should use a membership unit-based method of tracking membership in the LLC rather than just percentages. Units can be one of two types: preferred units or common units. The LLC's operating agreement then explains the attributes of each of the two classes of units.

The operating agreement can provide that preferred units have no voting rights but are entitled to larger, prioritized distributions and that common units have voting rights but get smaller, delayed distributions. This framework would fulfill the objective of mirroring the classic preferred/common share setup in a corporation.

LLCs, however, could also vary the rights of each of the classes of units to fit the LLC's unique needs. For example, the preferred units might carry some voting rights but less power than the common units; perhaps a 5:1 ratio for the number of rights a common unit owner gets per unit owned. Or, as another example, an LLC could provide a common unit owner the right to buy out preferred units at a certain price.

In sum, although LLCs cannot issue shares, they can create ownership structures that parallel those used by corporations and have a fair degree of flexibility in creating the structure.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

Ready to start your LLC?

Start an LLC online now