Can a Limited Liability Company (LLC) issue stock?
A limited liability company, or LLC, cannot issue stock. Instead, an LLC is structured to have single or multiple owners of that entity, who are referred to as members. Members can be added and subtracted over the life of the LLC, and profits are able to be distributed by varying amounts to each of the members.
Members are bound as owners by a signed partnership agreement instead of through stock issuance or option grants. Since no stock is issued to the members of an LLC, the entity is taxed as a pass-through entity. Each member of the LLC reports his share of the entity's profits on his personal income statement in the form of income, but the corporate entity itself incurs no taxes. This is unlike a C corporation or S corporation that issue stock, where members are double taxed. Profits from these types of corporations are taxed at the corporate level, and then any after-tax profits are distributed to shareholders and taxed as capital gains on their personal tax returns.
A lot of the same liability benefits of a C corporation or S corporation can be realized with an LLC. Each member of an LLC is protected against any debt taken on by the corporate entity and is protected against any potential lawsuits that may arise during normal business operations. This means all personal assets of the members of an LLC, both tangible and monetary, are protected by tax law.
In addition to reading Evan Tarver's informative answer about LLC’s and stock issuance, one other thing to consider with regard to an LLC and corporate stock issuance is the impact of LLC members “electing” to have the LLC be treated as an S-Corporation for tax purposes.
S-Corporate tax treatment (the election must be approved by the IRS) does not grant the LLC the power to issue stock.
But the treatment can be quite beneficial to the LLC members for a number of reasons including:
- a variety of tax saving benefits;
- potential improved credit worthiness
- and often better books and records.
All of these benefits may very well provide the LLC better access to credit and/ or capital.
Given a common reason business owners initially investigate the issuance of stock is for the purpose of raising money from investors, LLC members (who are not able to issue stock) may be able to achieve their goals by selling membership interest.
If the LLC owners (a.k.a. members) decide to sell portions of their ownership to others, they can raise money. Selling stock and selling membership interest are obviously not the same thing but they may achieve the same goal.
Finally, if the reason the LLC members are investigating the sale of stock is because the members want to generate cash, a viable option may be to:
- Elect to be treated as an S-Corporation so the members and the business will have improved taxation, credit access and books.
- If credit access is not enough, sell a portion of the company and have new investors become LLC members. The new investors will often be more willing to do this if the company has its own tax returns, solid financials and good books.
(It should be noted that partial ownership sales of LLC membership can be a little complicated and typically all the members will need to agree on the sale. Plus, current members are really going to want to know the new members well, so proceed with caution!)
It is possible for an LLC to issue something similar to stock, called membership units. Just like stocks, membership units divide up the ownership of the company amongst the owners of the units, allow the owners to vote for the directors of the company, and give them rights to share in the profits. LLCs can also be formed to express ownership as a percentage basis like a partnership. LLCs can also create different classes of membership units, just like corporations can with their stocks. (Think common stock verses preferred stock).
There is a lot of confusion about the LLC structure, and you may hear inaccurate information, even from reputable sources. This is partially due to the fact that LLCs are created by state law, and the details may differ from state to state. The fact they are created by state law also leads the IRS to allow an LLC to choose how they want to be taxed, either as a pass-through entity or as a C-corporation with double taxation.
All this flexibility allows an LLC to structure itself like a partnership, a C-corporation, or an S-corporation; giving the owners the ability to make the business fit their specific needs. I work with a lot of small business owners and I am always surprised by the strange information and advice they get related to LLCs. If you are planning to start or invest in an LLC, you will want to consult an attorney in your state familiar with the LLC laws, and consult a good financial advisor familiar with small businesses.
Investors should be especially careful of LLC investments because they are not easy to sell, are not regulated by the SEC, and do not provide the same protections and disclosure requirements as publicly traded companies. Financial advisors who push these investments may be offering advice based primarily on a big fat commission check they can earn by getting an investor to invest. Seek a fee-only and fiduciary financial advisor to give you an unbiased opinion of the investment.