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 can be distributed in varying amounts to each of the members. These members, however, are not shareholders of the company.
Key Takeaways
- LLCs do not have shareholders. They have members who share in the profits of the business.
- The members' share of the profits is taxable as income. The company itself has no tax liability.
- The LLC is a common form of business in the U.S. because its members are shielded from liability for its failure.
How LLCs Work
Members of an LLC become owners according to the terms of a partnership agreement rather than through stock purchases.
Note that the LLC is a company, not a corporation. Since no stock is issued to the members of an LLC, the company is taxed as a pass-through entity. The company itself incurs no taxes. Instead, members of the LLC report their shares of the entity's profits as taxable income.
How Corporations Work
The LLC, the C corporation, and the S corporation are all business structures unique to the U.S.
Unlike an LLC, a C corporation or an S corporation issues stock. Shares of the company's stock represent residual claims to the profits of the firm. The firm issues these equity shares in return for investments of 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 in a private transaction or on a secondary market.
A C corporation or an S corporation may issue stock.
Shareholders also are granted voting rights, which gives them a role in decisions on board of directors membership, management direction, and corporate actions such as mergers and acquisitions.
Corporate shareholders are sometimes seen as subject to double taxation. 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
Many of the limited liability benefits of a C corporation or S corporation can be achieved with an LLC. Limited liability means that the owners' personal assets are not at risk if the company fails, is sued by its creditors, or is sued for other alleged wrongdoing. 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.
