Can LLCs Issue Stock?
While the LLC is an excellent vehicle for business ownership and liability protection, it isn’t set up to issue shares of stock. Unlike a corporation, an LLC has members, not shareholders. Members of an LLC can hold an ownership interest and there can even be membership certificates, but not stock certificates as one would have with a corporation.
LLCs have more nuance than just whether or not they can issue shares of stock. Read on and you’ll learn about the limitations LLCs have with regards to raising capital, as well as how investing in an LLC differs from investing in a traditional corporation.
Limitations of LLCs
LLCs have fewer rules and regulations than their corporate counterparts, but they also have some limitations.
- No stock. While an LLC doesn’t have to deal with a board of directors or hold shareholder meetings, it also can’t issue stock. Some investors, such as venture capitalists, can’t invest in LLCs because the venture capital fund has tax-exempt partners that can’t receive active trade or business income due to their tax status. Other investors are looking for an exit strategy or an initial public offering of stock, where they can sell or buy more shares. LLCs are limited in this scope.
- Limited Transferability. LLCs, by their nature, are designed to be privately owned business structures that are operated by their members. The rights of members to transfer and assign membership interests are spelled out in the LLC’s operating agreement. The shares of a corporation can be bought and sold and bought again by third parties, but an LLC’s membership interest cannot be transferred to a third party as easily. For example, non-members can purchase the financial interest of an existing member as long as it is allowed in the LLC’s operating agreement, and as long as all members of the LLC agree to the purchase. Buying shares of a corporation is generally much easier.
- Fewer Fundraising Opportunities. LLCs are also limited in how they can raise funding. Corporations can issue stock to raise money to operate and expand their business. If you buy stock in Tesla, you’re buying a share of the company’s assets as well as its profits. Even if you only buy one share of stock, you’re still considered an owner of Tesla. This is why corporations are popular among venture capitalists and investors because ownership interest can be as simple as signing up online for a brokerage account.
These limitations may sound like drawbacks, but in many cases, these limitations are precisely what make LLCs so popular. Business owners may not want to be burdened by the regulations that outside investment can bring. LLC owners can keep an eye on and maintain control of the growth of their business—without the pressure of outside forces.
However, that’s not to say that investors are off the table for LLCs.
Can You Invest in an LLC?
The short answer is yes. While we’ve already established that an LLC cannot raise money by issuing stock like a corporation can, there are other ways for an LLC to grow. For example, if Sal’s Soup Barn, LLC needs to raise funds for a second location or a revamped patio space, the LLC member or members can grant “units” or “ownership interests” in the LLC. In short, a single member or multi-member LLC can add investors by selling them pieces of the LLC.
However, it’s important to note that bringing on an investor in a member-managed LLC gives that investor skin in the game and an equal voice on how things are run. This may be a non-starter for original LLC members. If you’re looking for a more passive investor who simply wants an opportunity for residual income, a manager-managed LLC might be the choice for you.
Before you get drunk on dollar signs and start adding members to the LLC, make sure your LLC’s operating agreement allows it, and that the other members are on board.The operating agreement (and in some states, your articles) will need to be amended to reflect changes in ownership.
LLC Membership Interest vs. Corporate Stock
Membership interests provide LLC members with the right to receive a percentage of the company’s earnings or profits, as well as a voice in how the LLC is managed. An LLC is different from a corporation in that it is able to distribute its membership interests in any way it chooses, regardless of the amount of capital contribution a member makes (assuming it does not violate state or IRS regulations). In addition, an LLC can have different classes of membership interests, which enables it to distribute profits and voting rights in a special manner.
LLCs can issue documents called membership certificates, which are somewhat similar to stock certificates. Unlike shares of stock, you won’t be buying an LLC membership certificate through a brokerage. And instead of the number of shares, a membership certificate notes the percentage of ownership. Membership certificates aren’t required, but they can be beneficial for LLCs with outside investors or several owners.
S Corp or C Corp Stock
Since LLCs cannot issue stock, one might wonder about an LLC’s ability to elect S Corp or C Corp status. While this may seem like a workaround that would allow an LLC to issue stock, it isn’t. Yes, the IRS refers to owners of both S Corps and C Corps as shareholders, but it is important to remember that electing to be taxed as an S Corp or C Corp does not change the legal structure of the LLC, and thus, does not give an LLC the ability to issue shares of stock based on its federal tax election.
Is an LLC Right For Me?
It all depends on what the goals for your business are. If you want to grow fast, raise money, and attract potential buyers for a million dollar exit, the LLC probably isn’t for you. If your goal is to grow your business and insulate yourself from lawsuits and bankruptcy while keeping outside investment close to home, you may find that the LLC is the perfect choice.
Considering forming an LLC?