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.

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.

Ready to start your LLC? Start an LLC Online Now

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.

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
Tax Differences of LLCs & PCs

References

Related articles

Can I File a Personal Chapter 7 If I Am a Partner in an LLC?

You can file a Chapter 7 bankruptcy, the same as any other person, even if you are a partner (known as a "member") in a limited liability company (LLC). However, filing for personal bankruptcy will affect your LLC ownership. State laws typically require that the bankrupt member be disassociated from the LLC. Each state regulates LLCs differently, but some have adopted the Revised Uniform Limited Liability Company Act, passed in 2006 by the National Conference of Commissioners on Uniform State Laws and recommended for adoption by all states.

Corporation Law Notes

A corporation is a legal entity that gradually developed into its modern form over hundreds of years. It is designed to encourage investment into potentially profitable projects by limiting the economic liability of its investors. In the United States, corporations are formed and governed by the laws of individual states.

What Is a Disadvantage of the Corporate Form of Business Entity?

Compared to other business entities, corporations offer many advantages, such as liability protection and ease of transferring ownership shares. Though corporations are very common, a corporation may not be the best structure for every situation, and it does have some disadvantages.

LLCs, Corporations, Patents, Attorney Help

Related articles

Difference Between LLC & Sub S Corporation

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

Incorporating Vs. LLC

One of the most important initial decisions in starting a business involves deciding what type of business entity your ...

S Corporation Structure

An S corporation is a tax designation that a business must apply for with the Internal Revenue Service. Used for small ...

Do LLC & LLP Have Stocks?

Stocks are used to raise funds to start a business or build its capital through the sale of shares. However, not all ...

Browse by category
Ready to Begin? GET STARTED