Do You Issue Stock in an LLC?

By Tom Speranza, J.D.

Do You Issue Stock in an LLC?

By Tom Speranza, J.D.

A limited liability company (LLC) is a business entity that combines the liability protections of a corporation with the flexible structure of a partnership. Unlike a corporation, an LLC does not issue shares of stock. Instead, an LLC issues membership interests that represent ownership rights in the company.

Businesspeople holding papers and talking

Membership interests in an LLC are different from corporate stock in several important ways:

Membership interests are usually not certificated.

The typical nonpublic corporation issues paper stock certificates to its shareholders. These are usually official-looking documents that include:

  • Corporation's name
  • State of formation
  • Shareholder's name
  • Class of stock and number of shares represented by the certificate
  • Share's par value (sometimes called paid-in capital)
  • Watermark and corporate seal

Corporations keep careful records of share certificates in a stock transfer ledger. And, if a shareholder loses or misplaces the certificate, there's usually a complicated procedure for obtaining a replacement. (Publicly-held corporations that are traded on stock exchanges often use electronic versions of stock certificates.)

LLCs usually don't issue membership interest certificates. Instead, the LLC's owners—the members—sign an operating agreement that spells out the rights associated with the membership interests and the rules for how the company will be managed.

An operating agreement defines membership interest rights.

The corporation laws in most states specifically define many of the rights a shareholder has when she owns stock, but a corporation's articles of incorporation or bylaws can modify a shareholder's rights in some limited ways.

LLCs are given much more flexibility under state LLC laws. The holders of membership interests are given only a few basic legal rights because most state LLC laws encourage LLCs to define the rights and obligations of their members in a written operating agreement signed by the members. So, unlike a corporation, an LLC can customize the bundle of rights and obligations associated with a membership interest and can theoretically create an infinite number of classes or series of interests that each have different rights and obligations.

A typical operating agreement covers the following topics:

  • Whether the members manage the LLC themselves or delegate that power to managers and officers
  • The members' right to approve (or reject) certain company actions
  • The members' obligations to contribute capital to the LLC if the business needs money
  • How and when profits are distributed to the members
  • The rights of the members to transfer membership interests
  • What happens to a membership interest if the member dies
  • What assets are distributed to the members if the LLC terminates or dissolves

Most operating agreements also have an exhibit at the end that lists the members by name and shows what percentage of the LLC each of them owns.

Membership interests have different tax implications.

Most LLCs are taxed like partnerships, which means they allocate annual income and losses to the members and issue Partner's Share of Income, Deductions, Credits, etc. (Schedule K-1 [Form 1065]) to each member. The members must include the income or loss in their individual tax returns. The allocation is usually tied to the percentage ownership represented by the membership interest. In other words, if a member owns a 30 percent membership interest, the LLC allocates 30 percent of its annual profits or losses to her.

The operating agreement defines a member's right to actual cash distributions from an LLC.

Corporations usually pay taxes on their income directly and only distribute profits to shareholders in the form of dividends. Unlike an LLC that must allocate all income and loss to the members each year, a corporation isn't required to pay dividends to the holders of common stock. If a corporation decides it has sufficient excess cash flow to pay a dividend, it reports that to shareholders on Dividends and Distributions (Form 1099-DIV) and the shareholders include such income on their tax return for the year in which the dividend was paid.

An experienced business lawyer can help you decide whether an LLC or corporation is right for your business and your coowners and investors. And, once you choose an entity type, a lawyer can provide advice about the kinds of stock or membership interests the company should issue.

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.