Can I Offer Ownership Options in My LLC?


You created a Limited Liability Corporation (LLC) in South Carolina, and now you want to raise capital by bringing in investors. Unlike a corporation, however, an LLC cannot sell shares. Since an LLC has some characteristics of both corporations and partnerships, you may be wondering whether you can sell ownership interests in your LLC. A business organization lawyer can help sort out the complexities.

Limited Liability Corporations in South Carolina

A limited liability corporation is a unique business structure that can protect you from legal liability in many situations, unlike a partnership or sole proprietorship, but an LLC is not a traditional corporation. An LLC does not issue shares. Since there are no shares, LLC ownership is determined by the percentage of ownership. The LLC can have different categories of voting rights among the owners. The owners can make unequal capital contributions and distribute profits unequally. An LLC can be taxed either at the corporate level, like a corporation, or on the owner’s tax return, similar to a partnership.

To offer ownership options in your South Carolina LLC, you must be a manager of your LLC and get the consent of all the LLC members before admitting a new member. To “buy in” to your LLC, a member may contribute tangible property, intangible property, or other benefits to the LLC. The contributions can be in the form of money or promissory notes. Other acceptable forms include performing services for the LLC, agreeing to contribute money or property, or contracting to perform services.

Thing to Consider Before Bringing in a New Member

All members of LLCs in South Carolina, whether they are managers or not, have a right to information from the LLC. If you bring in a new member, you have to give that member, as well as his agents and attorneys, access to inspect and copy the LLC’s records.

Filing an Amendment

You have to update your operating agreement when you bring new members into your LLC, but since South Carolina law allows your operating agreement to be either written or verbal, updating your agreement can be quite simple. If you need to change your articles of incorporation to reflect the new ownership arrangement, you will file an amendment to your articles with the Secretary of State and pay a $110 fee.

Tax Consequences of Selling LLC Interests

People often overlook the tax consequences when selling LLC interests. Because LLCs are a hybrid business form, the tax consequences of interest transfers can be bizarre. If you purchase a unit of ownership of an LLC for $20,000 then sell it for $20,000, you might assume that you would break even and there would be no tax consequences. That is the way it works in an LLC taxed as a corporation, but in an LLC taxed as a partnership, it is far more complicated.

A member’s basis in an LLC is in constant flux, changing whenever the LLC earns income, sustains losses, incurs debt, receives capital contributions, and makes distributions. A member’s gain can be a capital gain or ordinary income, and partly long-term and partly short-term. There are many other potential tax consequences of selling LLC interests, which is why you should get professional advice before entering into this transaction.

Since the laws are constantly changing, you should get the advice of a South Carolina business attorney before making any changes to your LLC. If you have questions about LLC membership shares and would like to speak with one of our attorneys, contact Willcox, Buyck & Williams, P.A. today for a consultation.