Legal Question in Business Law in California

Re: LLC and shareholding

A limited liabilty company (LLC) is more like a partnership or club than the impersonal corporation. There is a contract between the owners (who are usually referred to as "members")of an LLC (the "operating agreement").

"Legal, certified proof of their investment" can be provided by various means, including issuance of pretty engraved certificates, but the more usual way with an LLC includes:

1. The members know each other;

2. The members trust each other;

3. The members are active in the business of the LLC, or at least meet frequently to discuss its affairs.

4. The members have all signed copies of the basic LLC contracts, such as the operating agreement.

5. The members have a right of access to the LLC's books and records.

6. The LLC must file a basic statement of organization with the Secretary of State, which becomes a public record verifying its existence (but, of course, not its finances).

It is possible with LLCs to separate the managerial interests from the economic interests, and then the economic interests could be represented by certificates of interest similar to shares of stock, and they could conceivably (I've heard of it being done) be registered as securities and publicly traded. However, this is an extreme stretch of the LLC concept.

Whenever I answer a question from someone who seems to be about to solicit and receive investment funds from strangers, I always caution them to obtain competent securities counsel. The laws respecting issuance of securities, taking investment money, etc., are very tough, very complex, and the penalties for violations are very severe.

Your LLC 'shares' or 'economic interests' or 'memberships' would be treated as securities. There are three kinds of securities offerings: registered, exempt, and illegal. Since you are probably not registering anything with the SEC, you need to know what exemption fits your issue and why; otherwise (and maybe nevertheless) you will be committing a punishable offense.