We often get questions about LLC stockholders, bylaws, stock certificates, directors, minutes and sometimes a Limited Liability “Corporation.” It’s understandable to have questions about how LLCs are structured and operate. Here’s what you need to know.
Do LLCs have stock?
Typically, units of LLC ownership are not called shares of “stock”. In most LLCs, the LLC Agreement designates a certain number of what it calls “membership units” or “member interests” and may break them down further into a certain number of Voting Units and Nonvoting Units. This bifurcation is similar to how corporations can authorize voting and nonvoting stock, usually called “common” and “preferred” shares, respectively.
Stock, in the context of a corporation, means units of ownership that give its holders rights to a percentage of ownership, a certain number of votes, and possibly a certain dividend. Membership is used in the context of an LLC because in addition to the rights stockholders possess, LLC members more often manage the day to day business of an LLC, which in a corporation is a right usually left to the Directors.
One reason many people choose to form an LLC instead of a corporation is the simpler structure of having the rights of shareholders, directors and manager all be vested in one type of person.
Are there shareholders in an LLC?
Limited Liability Companies do not have stock or bylaws. In fact, LLCs have almost no features of corporations. LLCs are known in legal circles as “unincorporated entities” because they are creatures of contract, rather than corporations which are creatures of statute.
But what does it mean to be a “creature of contract”? Doesn’t the Delaware LLC Act authorize LLCs? Does that not make them statutory?
The general answer is that corporations have statutory formalities and hierarchies they must follow and cannot waive. Corporations have “default rules”, many of which the owners cannot change.
How is an LLC structured?
In the Delaware LLC, there is not a default rule to establish the LLC framework. Instead, its internal contract can establish the entire framework for an LLC. This contract is known as its Operating Agreement. After a general notice filing with the formation jurisdiction, called a Certificate of Formation in Delaware, the LLC private Operating Agreement takes over to set forth the ownership structure and management structure. It may provide for a broad business purpose or a single business purpose. It can give managers broad powers or narrow powers. It can provide for member liability or limit member liability for capital calls and other obligations.
Who Owns the LLC?
The LLC does not have stock or stockholders. Instead, the Operating Agreement has membership interests, which are not usually certificated. It’s all about the rights set forth in the Operating Agreement.
Delaware allows for maximum flexibility of contract when entering into an Operating Agreement. In exceedingly rare situations, LLC members use this freedom to “opt into” the Delaware General Corporation Law and establish members to establish rights of corporate stockholders who vote for directors who appoint officers. That anomalous situation is far from the norm. Most Delaware LLCs have owners called members and operators called managers whose power and duties are set forth in the Operating Agreement. This structure is much less bureaucratic than the corporate formalities which makes LLCs more popular.