Entrepreneurs in the United States can organize their businesses according to various structures, such as sole proprietorships, partnerships, corporations and limited liability companies. Limited liability companies, like corporations, sometimes can allow their owners to buy and sell partial ownership in the company on the public market. However, some differences exist between the ways in which these two business structures go about such management of ownership.
Stocks
A company uses stocks as an investment instrument to represent a certain amount of ownership. It distributes these shares of stock among various investors according to what they have put into the company, whether as cash or some other type of investment. If the company is publicly traded, stock owners can sell their shares on the public stock market. In the United States, only corporations - C Corps and S Corps - can represent company ownership in the form of stock. While limited liability companies are not corporations, and therefore have no stock, they can find ways around this barrier to allow public trading.
Units
When limited liability companies divide up ownership, they do so according to a percentage that they establish in the company's operating agreement or according to a certain number of units. These units function in a manner similar to how corporate stocks function, and if the operating agreement allows it, the owners of these units may publicly trade them on the stock market as if they were stocks. While such publicly traded limited liability companies do exist, they are much less common than publicly traded corporations.
Public Trading Stipulations
One special aspect of limited liability companies is that they can opt for the Internal Revenue Service to view them as sole proprietorships, partnerships or corporations for tax purposes. For a limited liability company to allow its owners to publicly trade units of ownership, it must opt for the Internal Revenue Service to tax it as a partnership. While publicly traded limited liability companies are similar to publicly traded corporations in various ways, they are not the same. For instance, corporations must pay corporate income tax before making distributions to shareholders. After receiving their distributions, shareholders pay personal income tax as well. Limited liability companies, on the other hand, are pass-through entities, which means that they do not pay any income taxes on the company level, leaving tax payment up to the unit holders themselves.
Legal Limitations
Since the strict definitions of specific business structures vary from one state to another, some states may not allow limited liability companies to publicly trade their units of ownership. This disparity between states is partially because the idea of having a publicly traded limited liability company is fairly new. If you intend to start a limited liability company and trade its units publicly, first investigate the legal requirements of doing so specific to your state.
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