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Limited liability companies (LLCs) do not have stock, nor can they issue it. Despite this fact, LLCs may have benefits over corporations, depending on your particular business needs and goals.
LLC as a Startup Vehicle
Compared to corporations, LLCs offer entrepreneurs a number of benefits that often make them a more appealing choice for starting a new business. For example, LLCs are typically more flexible than a corporation, cost less to start up, and require less paperwork, both initially and on an ongoing basis.
These features can be enticing for startups, so if you’re in this position and you’re wondering about issuing stock through an LLC, it’s important to consider the reasons behind your need for a business structure that can issue stock. You may find that, while the ability to issue stock is one path toward meeting your particular need, you might also be able to accomplish your goals through an LLC rather than a corporation.
A corporation’s ability to issue stock gives it a big advantage when it comes to raising capital. For both institutional investors and individual investors, investing in the shares of a corporation is usually a far better option than investing money in an LLC.
For institutional investors, in particular, investments in LLCs are trickier from a tax perspective, as LLCs are flow-through entities when it comes to taxes. This means income generated by the LLC flows through the LLC to be taxed in LLC members’ hands, which can have potentially negative consequences for the institutional investor’s tax situation.
However, the same may not hold true for the individual, or angel, investor. While stocks deliver an efficient method of investing in a business for individual investors, they are more likely to take a more flexible, personal approach to evaluating investment opportunities. For such investors, the inability to invest through the purchase of shares may be a negative review, but other factors may be sufficient to make an investment in an LLC attractive to them.
In many cases, if your goal is to raise capital through investors, the corporate structure will likely make more sense. However, if you’re intending to primarily pursue individual or angel investors, an LLC could still be a viable business structure.
Without a doubt, stakes provide an efficient way to provide multiple ownership interests in a company. But if you’ve been thinking about a corporation mainly because you plan on having multiple owners of your business, it may not be necessary to write off an LLC as a viable option just because LLCs can’t issue shares.
While many LLCs are single-member LLCs, you can also form multi-member LLCs. Multi-member LLCs offer the same benefits and qualities as single-member LLCs. For example, members of a multi-member LLC have the same limited liability protection as the owner of a single-member LLC.
The primary difference between a single-member and multi-member LLC is how they are taxed by the Internal Revenue Service (IRS). While both are considered flow-through entities, the IRS treats the single-member LLC as a disregarded entity, while multi-member LLCs are taxed as partnerships.
Although theoretically there’s no real limit to the number of members you can have in a multi-member LLC, each member’s interest in the LLC should be set out in full in the LLC’s operating agreement. From a practical perspective, then, if a large number of people will hold ownership interests in your startup, a corporation may be the better choice despite its decreased flexibility and the increased costs and filing requirements.
One critical consideration in choosing between a corporation and an LLC is your ultimate goal for your new business. For example, if your goal is to grow your business rapidly in order to attract potential buyers for a big buyout, or you want to eventually take your business public through an initial public offering (IPO), a corporation would be the better structure for your company.
While you can always change an LLC to a corporation in the future, additional costs are associated with this change, so starting out as a corporation might be your best option.
On the other hand, if your plan is to continue running your business for the long term, you may not need the ease of transfer of ownership that stocks provide. In such cases, the benefits of running your company as an LLC may outweigh the disadvantages of not being able to issue stock.
S Corp or C Corp Election
You may have also wondered about the LLC’s ability to select S corporation or C corporation status. It’s important to understand that the election of such status is from a tax perspective only. If you elect to be taxed as either an S corp or C corp, this election doesn’t affect the legal structure of the LLC.
Because IRS terminology refers to shareholders of an S corp or C corp, it can be disconnected. But for LLCs, this reference to shareholders simply means the members of the LLC. Electing to be taxed as an S corp or C corp doesn’t result in your LLC gaining the ability to issue shares.