Does a Limited Liability Company Have Shares?

By Jeff Franco J.D./M.A./M.B.A.

Ownership interests in a limited liability company business structure are not represented by shares. Shares in a company are only issued for businesses that use the corporate structure. The owners of an LLC are called members, and each has a membership interest representing an undivided claim in all assets of the business and the right to a portion of business profits.

Ownership interests in a limited liability company business structure are not represented by shares. Shares in a company are only issued for businesses that use the corporate structure. The owners of an LLC are called members, and each has a membership interest representing an undivided claim in all assets of the business and the right to a portion of business profits.

Transferability

Unlike the shares in a corporation that are easily exchanged, the transfer of a membership interest in an LLC has more restrictions. State laws do not allow for the transfer of a member’s right to engage in management activities. However, a member can sell or exchange a financial interest in the LLC. The transferee of the interest receives a legal claim to the portion of assets and profits that the transferring member has. If the operating agreement of the LLC allows for the transfer of management rights, then the state prohibition is inapplicable.

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Becoming a Member

An investor can become a member of an LLC at the time of formation if he is included in the certificate of organization. A person may later join the LLC only with the unanimous consent of all current members or by a method the operating agreement stipulates. Although an operating agreement may require it, most jurisdictions do not require a prospective member to make a contribution of money or property to the LLC as a condition to acquiring an interest. In contrast to a corporation, more barriers to entry exist with an LLC.

Profit Distribution

Most of the jurisdictions do not require an LLC to distribute its profits to members. However, in the absence of an alternate profit allocation in the operating agreement, members have equal rights to the earnings of the company whether they are distributed or not. Regardless of what the operating agreement stipulates, a distribution is never allowable if it will prevent the LLC from paying its debts or meeting other obligations in the normal course of business. Additionally, the distribution may not cause the company’s liabilities to exceed assets. If a member with authority to declare a distribution does so in violation of a state prohibition, that member is personally liable to the LLC for the improper amount of the distribution. A profit distribution is similar to a shareholder’s entitlement to a dividend; however, shareholders have no claim on the company’s earnings as members of an LLC do.

Taxation

Just as shareholders must pay personal income tax on a corporate dividend, members of an LLC must pay tax on profit distributions if the LLC elects corporate tax treatment. However, the Internal Revenue Service automatically designates an LLC as a partnership for tax purposes if more than one member exists. Partnership taxation imposes pass-through principles that require each member to report their allocable share of business profits on a personal tax return, irrespective of whether there is a distribution or LLC retention of its earnings.

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Does an LLC Pay Dividends?

References

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Distributions to LLC Members Vs. Dividends

Members of a limited liability company, or LLC, and the shareholders of a corporation are similar in that they each hold all ownership interests in their entity’s underlying business. As owners, members and shareholders have an expectation of monetary gain on their investments, but they receive them in different ways. The members of a LLC receive distributions of profit, whereas the common shareholders of a corporation can receive dividends.

LLC & Profit Distribution

The members of a profitable limited liability company are entitled to receive periodic distributions from the business’s earnings. Most jurisdictions provide the framework for the types of distributions that may not occur. However, LLC members are free to stipulate the terms and eligibility requirements for distributions that do not inherently violate state regulations.

Can an LLC Be a Joint Venture?

Jurisdictions within the United States allow for the creation of a limited liability company structure to run the operations of a business. There is no restriction on the number of owners who are eligible to become LLC members before or after legal formation. For this reason, the LLC may be an appropriate entity choice for a joint venture that has multiple investors.

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