How to issue shares for LLC?
Keep reading to learn more about this company type and how to issue shares in an LLC.
Shares are essentially pieces of the company that can be issued to investors to raise funds. Stocks can be sold many times, and the price will be reflected by changes in demand and the value of the company. This is not limited to only giant public corporations, but also for issuing shares in an LLC. These LLC shares would help you in gaining funds that would help your company grow.
What is a LLC or Limited Liability Company
A limited liability company is a business structure in the US that provides a pass through taxation of a partnership or a sole ownership with the protection of personal liability in a corporation.
Advantages of LLC
There are many advantages of an LLC, and they include:
- Protection of Personal Assets – The owners of an LLC are not personally liable for possible lawsuits or debt that the LLC may face. It means that in case the company goes bankrupt or if the company is sued, the owners would not have to use their personal assets such as their house, car or even their savings to pay for the legal procedures and other fees. The company’s funds and assets would be used for such a situation. But it is important to bear in mind that this is applicable only if there was no fraudulent activity or criminal behavior of the owner.
- Pass-Through Taxation – In an LLC, the proceeds go to its owners, then they report the share of proceeds received in their individual tax returns. This eliminates double taxation (such as in C corporations) and the proceeds are only taxed one time, which is called pass-through taxation.
- Flexibility – While structuring the ownership of an LLC, there are a couple of things you should know that makes it flexible:
- In a multi-member LLC, the manager (appointed by the members) can manage the company. This is called manager-managed
- In a member-managed LLC, the company is managed by its members.
- The LLC can be Multi or Single-membered.
- An LLC has the flexibility to choose how to be taxed, either like a S or C corporation.
- Simplicity – With little paperwork, an LLC is fairly easy to set up and maintain. In an LLC, duties of S-corporations and C-corporations like annual general meetings, resolutions, assign formal officer roles, and record company minutes are not required.
- Increased credibility – Compared to a partnership or sole proprietorship, an LLC is perceived to be a more formal structure of business. This is why when you form a limited liability company, it comes with added credibility. The LLC behind your company name shows partners and customers that your business is credible.
How does an LLC work?
Allowed under state laws, a limited liability company is a type of a business structure, in which the owners of an LLC are usually called members.
A majority of states do not restrict the ownership of an LLC, which means that anyone can own it such as corporations, individuals, other LLC’s, foreigners, and also foreign entities. But an LLC is restricted in some business sectors, like insurance and banking. They can not form an LLC.
In an LLC, an article of organisation is required to be filed with the state as it is a more formal business structure. With more protection and flexibility, a limited liability company is easier to form when compared to a corporation.
An LLC is made up of members who own shares in the company. But how do “members” and “shareholders” differ, and how do LLC shareholders and member certificates work? Here is what you need to understand.
Does LLC have stock?
In an LLC, the units of ownership are not known as shares of ‘stock’. The majority of the LLC’s agreement delegates a particular number of “membership interests” or “membership units”. These LLC shares or units may also be further broken down into two types: the voting units and the non-voting units. This is the same as the way corporations divide and delegate voting stock and non voting stock, generally known as preferred shares and common shares respectively.
In the context of a corporation, a stock means parts/units of shares that awards its holder the right to an ownership percentage, a possible fixed dividend, and a given number of votes. LLC members more often tend to manage the daily business operations of the LLC in addition to the stockholder rights they possess, which is why membership is used in the context of a limited liability company. Usually in a corporation, the right is left to the directors that they use to hire a professional team.
Most people who choose to start a limited liability company instead of going the normal way and starting a corporation is the simple structure of possessing the rights of directors, managers, and shareholders. All of these duties given to one person without the need of another or more people.
Does an LLC have shareholders?
In a limited liability company, they do not have bylaws or stock. As a matter of fact, a LLC does not have the features of a corporation. LLCs are creatures of contract which is why they are known as “unincorporated entities” in legal circles, whereas corporations are known as creatures of statute.
LLC Membership certificates
The documents that are used to denote the membership of individual members in the company are known as membership certificates. This is almost similar to the way corporations issue stock certificates to shareholders. The LLC membership certificate must include the following information:
- The state your LLC is organised in
- The limited liability company name
- The number of members in the limited liability company
- Name of the holder of this certificate
- For the members, a witness signature
- LLC membership certificate bill of sale
- The benefits that the member of the limited liability company is entitled to
- Chain of ownership to determine membership interests
- What percentage of ownership interest the holder has in the LLC
Issuing Shares in LLC
If you are wondering about the way shares are issued in an LLC, here is how. Generally, before the registration of the Limited liability company, the distribution of membership interest is done. Within the operating agreement of the LLC, the ownership stake is usually included.
A majority of LLCs constraint themselves from issuing stock certificates just like a corporation, but some LLC do so. Contrary to corporations that issue their stock after the official registration of the company, the Articles of organisation require the names of the owners in the documents. This means that the issue of ownership needs to be dealt with and settled before the official formation of the limited liability company.
But can the list of owners change? Of course they can change the members of the list, as it is required by the state government that the LLCs annually update their fillings whenever there is a membership change.
In an LLC, the distribution process of the ownership interests is far from the hyped and formal share issuance of corporations. Even though there are owners that issue membership certificates in an LLC, it is not mandatory as most owners of LLCs agree and formalize the details of ownership in the LLC by making an operating agreement.
Despite it not being a mandatory requirement in a limited liability company, the operating agreements are drafted by business owners that plan into the future and want to reduce the possibilities of potential conflicts in the business among the owners. The majority of LLC members are associates who get together and agree to form a limited liability company, and do not need funding through public issue of stock.
Characteristics of LLC shares
Here are the characteristics of LLC shares:
- Profit distribution: The model of profit distribution can be decided by the LLC members. As long as the model is stated in the limited liability company’s operating agreement, the distribution of profits do not need to be determined on the basis of the ownership stake like it would have been typically. It can be determined by other major factors affecting the same.
- Buying and selling shares: In an LLC, the members interest can be transferred from one person to another. Depending on the operating agreement, the specific process will take place to transfer the interest. The other members of the LLC must consent before a member sells their interest to someone. This enables the LLC to survive even at events such as the death of a member/shareholder, making them have a perpetual existence.
- Different rights: Unless the operating agreement of the LLC states otherwise, the rights can be distributed as wanted, despite the requirement by states for the LLC members to have equal rights. It is not uncommon to see LLCs with members that do not have voting rights but rights similar to preferred and common share in a corporation.
- No need of cash for ownership stake: In an LLC, the cash contribution of the members can be made independent of the ownership interest. If the ownership agreement allows, then even members that have not contributed in cash can have ownership in the LLC. eg. a limited liability company with an owner who’s contribution is in legal services and not in cash.
- Liquidation: Like everything else, the process and share of members during the liquidation of the limited liability company can be detailed in the operation agreement. On the disposal of their assets during the liquidation, states generally give LLCs some flexibility. To distribute assets during the process of dissolution LLCs can use other criterias, unlike S corporations who must base their numbers on the number of shares per person.
Manage your LLC Shares on Eqvista
Eqvista is a great application that allows you to easily manage and track all the shares of your company. You can easily issue LLC shares, add shareholders and manage everything from here. The Eqvista app also has features to add a vesting schedule and also make smarter financial decisions through our financial modeling tools.
In addition, you can also share your company’s cap table with your lawyer or accountant, and choose if you want to share the complete cap table or just a part of it. Eqvista makes your life easier and reduces the time you would spend on paperwork and creating an excel sheet to track all the shares in the company. So, what are you waiting for? Try out the app today!