A limited liability company (LLC) cannot issue shares of stock. An LLC is a business entity structured to have either a single or multiple owners, who are referred to as the LLC's 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. These members, however, are not shareholders of the company.
- Limited liability companies, or LLCs, are a common form of organizing a business in the U.S.
- Unlike corporations, LLCs do not issue shares of stock to investors or owners. Instead, LLCs have members who receive their share of the firm's profits.
- LLCs still afford many of the legal benefits of limited liability that protect owners' personal assets from actions taken against the business.
How LLCs Work
Members of an LLC 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 instead of the company paying its own corporate taxes. Each member of the LLC reports their share of the entity's profits on his or her personal income statement in the form of income, while the corporate entity itself incurs no taxes.
How Corporations Work
This is unlike a C corporation or S corporation that issues stock. Shares of a company's stock represent residual claims to profits of the firm. The firm issues these equity shares in return for capital that the firm uses to fund its operations or growth opportunities. Shareholders in a corporation may receive dividends and are often able to sell their shares to other buyers on a secondary market such as a stock exchange, or over-the-counter.
Shareholders also are granted voting rights, which enable their voice to be heard in matters of board of directors membership, management direction, or corporate actions such as mergers and acquisitions.
Corporate shareholders are sometimes seen as subject to double-taxation. That means that 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.
LLCs and Limited Liability
A lot of the same limited liability benefits of a C corporation or S corporation can still be realized with an LLC. Limited liability means that the owners' personal assets are not at risk if the company fails, is sued by creditors, or sued by those claiming other wrongdoing. Instead, the owners can only lose up to the amount of money that they have invested in the firm.
Each member of an LLC is legally 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 financial, are protected by tax law.