Does an LLC Have a Stock Certificate?
IRS rules allow LLCs, or limited liability companies, to hold stock and thus have a stock certificate for shares they own in regular or C-Corporations, but LLCs cannot issue stocks or stock certificates themselves because they're not corporations. Understanding how corporations issue stocks and how LLCs are organized to accomplish the same purposes without stocks can help you decide which ownership form is best for your business.
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Formation of a Corporation
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Corporations are formed by filing articles of incorporation with your state's Secretary of State or Division of Corporations. The articles of incorporation state the name, purpose, principal place of business and, often, the amount and type of stock the corporation will issue to owners. Stocks are an owner's proportion of ownership measured in equal units, called shares. The bylaws are the document that outlines how the corporation will govern its internal affairs and make decisions.
Formation of an LLC
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LLCs are formed by filing articles of organization with your state's Secretary of State or Division of Corporations. The articles include similar information to articles of incorporation, except that LLCs cannot issue stock, and the "owners" are members, not stockholders. The operating agreement is signed by members and, among other things, fulfills many of the purposes that stock certificates and by-laws do in corporations: it defines ownership interests, voting powers, rules for meeting and voting, how profits are disbursed and how the entity is managed.
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Profits and Losses
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Corporations use stocks as a way to divide ownership, profits and losses in proportion to how much of the company, i.e., how many shares, the shareholder has purchased. This means that if you hold one third of the corporation's stock, you'll have one third ownership, receive one third of the profits and take one third of its losses. Since LLCs don't issue stocks, their operating agreements define the member's ownership stake and their share of profits and losses and can do so in a way that isn't proportional to the amount of capital the member invests, if they so choose.
Advantages and Disadvantages of Operating Agreements
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LLC operating agreements' flexibility can be an advantage, although you may need to pay the extra expense of an accountant or tax attorney to steer clear of complicated IRS rules intended to avoid abusing those advantages. However, operating agreements limit how ownership can be extended, because revising a document is less practical than selling stock, as a corporation can do, when trying to raise capital for the business from a number of investors.
Advantages and Disadvantages of Issuing Stocks
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An advantage of stocks is that businesses can use them to attract investors or motivate top employees through stock options or stock bonus incentives. However, as "securities," stocks are subject to state and federal securities laws that can come into play if your business plans to use sales of stock to raise capital from a large number of investors. For example, corporations are required to register the sale of their shares with the federal Securities and Exchange Commission (SEC). Registration requires the time and expense of working with lawyers and accountants unless the corporation qualifies for a "private offering" or sale of shares when there are less than 35 shareholders, among other possible exceptions.
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References
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