Can an LLC Issue Stock?

Nonetheless, it does not imply that your LLC will not be able to attract capital through investors, it only means that you will have to approach them in a different manner. The following is a breakdown of the differences between LLC ownership, tax, and fundraising and corporations.

LLC Ownership Structure

The owners of LLC are called members and every member has a percentage stake in the company. Such ownership percentages normally define the distribution of profits and losses, however, they can be distributed differently by the members specifying this in the operating agreement.

Members get ownership via capital contributions cash, property, or other valuable resources or by making contributions of labor or services. There are no restrictions on the number of members of an LLC, however, having more than one member increases the amount of tax returns required, since LLC does not have S-Corp status. Then, there are no more than 100 members of an LLC. The members can be persons, other LLCs or even corporations.

The sharing of profits is usually proportional to the ownership of all the members and they are also entitled to the right of voting and managing the LLC as spelt out in the operating agreement of the LLC.

How Corporations Differ

Corporations on the other hand are owned by shareholders, who are the stockholders. Shareholders contribute money towards the stock and they are not themselves liable towards company debts. They participate in the profits of the corporation in terms of dividends, and have a free transfer or sale of stock, which is subject to the corporation bylaws.

The corporations must have a board of directors, to which significant decisions are approved, such as the issue of new shares of stock. In the case that new stock is diluted, the ownership of existing shareholders is diluted accordingly. This form of organized transferability of ownership is just one of the reasons why the investors usually favor corporations as compared to LLCs.

LLC Taxation

In the default case, LLCs are treated as pass-throughs, i.e. the business is not taxed. Rather it goes to the personal tax returns of the members.

Default Taxation

Sole proprietorships are taxed like single-member LLCs.

Multi-member LLCs are subjected to partnership taxation.

Corporate Tax Election

C-Corporation: The profits are taxed at the corporate tax rate of 21 percent, and the distributions also are taxed (taxed twice).

S-Corporation: Pass through taxation, the self-employment taxes are not paid but payroll management is required.

Critical Investigations of Tax Elections

It is worth remembering that there are no ownership rules that are changed during tax elections. Although LLC may be taxed like a C-Corp or S-Corp, it cannot issue stock. Income reporting and taxation are the only effects of the tax classification.

Raising Capital in an LLC

The LLCs are not able to issue stock but they can raise money by taking in new members or they can get a capital contribution. In most cases, the investor is contributing money with the aim of a percentage ownership as it is in a corporation. Negotiation is done on:

The amount of ownership that the investor will get.
Voting rights and management duties.
Modifications in the operating agreement to include new member.

The current members usually dilute their share equally to fit in the new member. The operating agreement should explicitly describe the procedure of admission of new members with or without a voting or approval condition.

Since transferring ownership in LLC is more complicated than in an LLC corporate stock, the investors are not so keen on LLC. It is all under the watch of state laws and all members have to be in agreement regarding terms of the investment and therefore LLC investments are not as easy as purchasing shares of a corporation.

Key Takeaways

LLCs cannot issue stock. It is only the corporations that can create and sell stock.
The percentage of the ownership of the LLC members is not share but is measured in the operating agreement.
LLCs may finance with the addition of members or capital contribution but this is more complex than with the sale of corporate stock.
Tax elections (C-Corp or S-Corp) have an impact on the taxation of income, but do not allow issuing stock.
Investors can like corporations due to the reason that corporate stock is easier to transfer and manage than LLC membership interests.

Conclusion

Concisely, LLCs are flexible, provide liability protection, and have good tax provisions, but are not made to issue stock as corporations are. Any one, who wants to attract more investors, who are fond of owning stocks, could have to think about adopting a corporation instead.