What Is the Difference of a Shareholder Vs. a LLC Member?

By Cindy Hill

Corporate shareholders and limited liability company members both have ownership interests in the business entity of which they are a part, but there are many differences between the two. Management rights, transferability, debtor accessibility and receipt of profits differ between shareholders and LLC members.Taxation also differs dramatically between LLCs and corporations, though the extent of difference depends in part on how the LLC has elected to be taxed and the type of corporation.

Management Structure

The management structure of an LLC is set privately by an operating agreement between the members. This operating agreement sets out whether the members will have management duties or whether they should hire a manager. The operating agreement also defines voting rights, buy-out provisions and terms for dissolving the LLC. These terms can generally be decided upon by the members themselves. Corporate governance is more formal, more public and more tightly controlled by statute. Articles of incorporation must be filed with the state corporations office, and state statute mandates the extent to which bylaws must be maintained and minutes of meetings kept. LLC members, as well as shareholders in closely held S corporations, are usually actively involved in the business management, while shareholders in general business corporations may often be arms-length investors, uninvolved in running the business.

Limits and Transferability

General business, or C corporations, can issue large numbers of shares of different classes, but C corporation income is taxed at both the corporate and shareholder level, so small business owners tend to choose between LLC and S corporation structures. Between these two pass-through entities, S corporation share issuance is much more limited than LLC membership. S corporations can only issue one class of stock, and no more than 100 shares, all of which must be to individuals who are US citizens. LLC memberships are unlimited in number, may be issued in different classes with different rights and responsibilities, and may be held by other business entities and foreigners.

Ready to start your LLC? Start an LLC Online Now

Profits and Taxation

LLC operating agreements may choose to grant an interest in profits to only some members or classes of members. S Corporation profits are distributed on a per-share basis, and cannot vary between shareholders. LLC members generally must pay self-employment taxes on income derived from the LLC. Corporate shareholders, even shareholders in closely-held S corporations, do not have to pay self-employment taxes on their profits. Corporations issue stock certificates that indicate a shareholder's interest, while LLCs are not required to issue pieces of paper to indicate ownership. General corporation stocks can be broadly sold and transferred, while S corporation stock transfers must be to eligible shareholders and LLC membership transfer limits are set out in the operating agreement.

Creditor Access

Corporate shares, even in an S corporation, may be seized by judgement creditors of the shareholders. If the judgement creditor secures enough shares, he or she may acquire a controlling interest over the business. Judgement creditors of an LLC member, however, can only receive a charging order entitling them to the distributions that the LLC member would have received, and cannot seize the membership itself.

Ready to start your LLC? Start an LLC Online Now
LLC Explained
 

References

Related articles

Can an LLC Offer Both Preferred & Common Shares?

A limited liability company, or LLC, is a popular type of business association that offers small business owners flexibility and simplified formalities. An LLC is not required to have multiple owners or a board of directors, and LLC owners can determine how their LLC will be structured and operated by executing an operating agreement. However, LLCs cannot issue stock.

LLC Problems With a Minority Shareholder

A limited liability company is a business entity designed to combine the tax advantages of a partnership with the limited liability protection of a corporation. Corporations can majority and minority shareholder, but LLCs have majority and minority members. The difference in terminology only reflects the difference in the type of business entity. Although the relationship between majority and minority members is often harmonious, problems can arise. The specific resolutions options vary by state, but all states take into account the same basic considerations for the more common scenarios.

Do You Issue Stock in an LLC?

Entrepreneurs have several options when determining which legal entity to use for a business. Two common structures are corporations and limited liability companies. Both types of entities offer similar levels of personal liability protection to owners; however, differences exist in the rights of each owners and the ease at which an interest in the business may be sold or exchanged.

LLCs, Corporations, Patents, Attorney Help

Related articles

Difference Between an LLC & a PLC

A LLC, or limited liability company, is an unincorporated business. Owners are known as members and in most states can ...

Difference Between LLC & Sub S Corporation

Limited liability companies (LLCs) and Subchapter S corporations (S corps) have both become popular corporate forms for ...

Can an Owner Be Voted Out of an S Corporation?

S corporations are corporations that have made a special election with the Internal Revenue Service to be taxed only at ...

Taxes on a C-Corp Liquidation

When a corporation ceases its business operations, all assets owned by the company must be distributed. This process is ...

Browse by category
Ready to Begin? GET STARTED