In strictly technical terms, no LLC can sell shares. Ownership in an LLC, or limited liability company, is based on a percentage of the company not by the number of shares owned. That's true for single member LLCs and multiple member LLCs.
However, in practical terms an LLC can operate very similarly to a corporation that can sell shares. Let's take a closer look.
What is an LLC?
An LLC is a limited liability company, which is a legal form with characteristics of both a corporation and a partnership. An LLC will protect its owner(s) from many legal liabilities where a sole proprietorship or partnership would not, it does not issue shares like a corporation, and it can be taxed via the owner's individual tax returns like a partnership or at the corporate level like a corporation.
The exact structure and rules for creating an LLC vary by state, but in general the process is fairly simple. In almost all cases, the process is as simple as filing out a small amount of paperwork and paying a fee.
Once formed, the ownership of the LLC is defined by percentage ownership. The LLC has lots of flexibility in how it divides its ownership interest -- different owners can have different voting rights, different capital contributions, and even different profit splits. All of these details require the LLC to have an operating agreement to dictate exactly how all the interests are structured.
If they don't sell shares, how do they raise capital?
To raise capital, an LLC simply reallocates the percentage ownership to the new percentages for the owners. There is no need to issue new shares. In most cases, the LLC can simply accept the capital and update the operating agreement.
Likewise, if an LLC is to be sold, the entity can be sold in whole without the need to individually transfer all of its assets. The LLC can even keep its existing tax ID number and bank accounts. For sole proprietors and partnerships, on the other hand, selling the entire business would require selling each individual asset and creating a new business entity with new bank accounts and a new tax ID.
Lots of options for the small business
The options available for forming a business entity is immense. LLC's and corporations alone are just scratching the surface. There are C-corps, S-corps, partnerships of all shapes and sizes, and more. Each option has different characteristics in how they protect owners from liability, how they pay taxes, and what rights each owner has.
If you are unsure or unfamiliar with how this choice will impact your business, it's a good idea to contact an accountant or tax lawyer to assist you in making the decision and properly navigating the process. With all the choices available, seeking this kind of personalized advice to match your needs is a smart way to start your business on the right foot.
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