While many folks start a limited liability company (LLC) to launch a small business, there are other reasons why someone might opt for an LLC. The flexibility in management, tax perks, and the shield it provides for personal assets make LLCs a solid choice for investment ventures.
Since an LLC can have multiple members, it’s often the preferred business structure when a group of people wants to invest together. Whether you’re eyeing real estate, stocks, or a startup, this article serves as your go-to guide for understanding investment LLCs and how kicking one off could work in your favor.
Overview: Investing as an LLC
Whether you’re pooling funds with pals, setting up a family investment team (think: multi-member LLC), or managing your own investments (like with a single-member LLC), launching an LLC can provide that crucial divide between your investment ventures and personal accounts. Establishing a separate legal entity, such as an LLC or corporation, is the surefire way to shield yourself from personal liability, which is especially key if you’re eyeing high-risk ventures or real estate.
Regardless of who’s joining your LLC crew, drafting an LLC operating agreement is key—even if your state doesn’t require it. This document should outline important membership details, like how membership can be transferred, expected financial contributions, and the decision-making process.
Taxes
When weighing the option of an investment LLC, your main focus should be on the potential tax implications. All LLCs enjoy pass-through taxation, meaning the business’s income is taxed on the member’s individual tax returns rather than at the entity level. However, it’s not always a guarantee that you’ll save money by investing through an LLC instead of using a more informal structure, like a sole proprietorship.
In typical business setups, LLC members pay income tax on their earnings from self-employment. But when it comes to using an LLC for investments, its pass-through status matters less. Income generated through stocks, real estate, or other assets exchanged within the LLC is considered capital gains, and members are still on the hook for taxes to the IRS.
Claiming capital gains isn’t necessarily more complicated than other income types—you just need to file the right tax return. However, the tax rate varies depending on how much profit you make on the asset and how long you’ve held onto it.
LLC For a Group of Investors
If you’re rounding up a crew for an investment venture, setting up an LLC is likely the most budget-friendly route. Each member pitches in some cash, then any profits the LLC makes get divvied up among the members, and everyone pays taxes individually on their cut. Having an LLC operating agreement is crucial in this setup—it lays out how the profits are split, especially handy when your investors aren’t all family (think: a group of friends or investors).
Putting all the terms and requirements in writing is key to ensuring everyone’s clear on what’s expected with their membership and to keeping folks accountable for their contributions.
LLC For Family Investment
Using an LLC to manage assets and investments for your family is a popular move for those seeking a creative approach to estate planning. With this setup, there’s typically a single manager—whether a member of the LLC or not—calling the shots on the money and making financial decisions geared toward long-term gains.
Usually, setting up a trust is the go-to method for passing wealth down to family members, aiming to sidestep probate court and hefty estate taxes. But unlike trusts, where there are often restrictions on withdrawals, LLCs offer more flexibility. This can be a plus for families who want access to the funds sooner rather than later. Plus, LLCs beef up asset protection against creditors and other potential threats to your wealth.
Investing in Real Estate With an LLC
Since they first came onto the scene, LLCs have been a go-to for folks looking to safeguard their real estate investments—especially rental properties—to keep their personal assets out of the line of fire. See, because an LLC is its own separate entity from the owner or member, if the LLC faces a lawsuit or foreclosure on its property, only the assets held by the LLC are on the chopping block. Your personal stuff stays protected.
Real estate tends to hold its value better than other investments, but it often comes with a heftier price tag. So, diving into real estate without an LLC to shield your personal wealth can be a pretty risky move. Plus, if your LLC is renting out its property, there’s always the chance of a lawsuit if, say, a tenant has an accident on the premises.
Since the income made by the LLC gets passed through the entity, each member needs to pay taxes on their slice of the pie—whether it’s income or capital gains. But fear not, there are plenty of tax write-offs available to help you cut down on what you owe. For a deeper dive into how to use an LLC for real estate investing, check out our detailed article.
Investing in Stocks With an LLC
Just like individuals, LLCs can dive into the stock market. But unlike using an LLC for real estate, setting up a brokerage account to invest in stocks, bonds, ETFs (exchange-traded funds), and mutual funds carries much less risk to your personal assets. Unless you’re using an LLC to organize multiple investors, there aren’t many perks to using an LLC for stock investments.
Now, if your LLC is already pulling in income from an existing business or real estate gig and wants to grow that cash by dabbling in the stock market, that’s a different story. In that case, it’s a good idea to chat with a financial advisor about how to jump into the market and snag some tax-saving strategies along the way.
How to Start an Investment LLC
LLCs are formed under state laws, meaning the process varies depending on where you’re setting up shop. But no matter the state, all LLCs have to file articles of organization (also known as a certificate of formation) and pay a filing fee to the state office in charge—usually the secretary of state.
Every state also requires the LLC to name a registered agent. This person, who can be an individual or a registered agent service, needs to be a resident of the state where you’re filing. They’ll be the ones to receive all the important state, tax, and legal docs for your LLC.
Though not mandatory in every state, putting together an LLC operating agreement is one of the most crucial steps when launching an LLC. This agreement is your best bet for protecting your assets and keeping your personal and investment funds separate. Setting up a separate bank account for your LLC should go hand in hand with drafting this agreement. It’s also wise to keep detailed financial records so that when tax time rolls around, everything’s crystal clear about where your funds came from and where they went.
FAQ: Starting an LLC For Investing
Should I Create an LLC for My Investments?
It all boils down to what kind of investing you’re diving into. If real estate’s your game, then yup, setting up an LLC can be a smart move! Compared to holding the property under your own name, an LLC offers a nice layer of protection for your personal assets.
But if your plan is just to use the LLC for opening an investment account, it might stir up more trouble than it’s worth. Best-case scenario, your tax bill stays the same—but worst case, it could end up even higher, especially if your LLC starts raking in big bucks.
What’s the Difference Between a Brokerage Account and an Investment Account?
A brokerage account is like a hub for your investments, mainly for stocks, bonds, ETFs, and mutual funds. Keep in mind, though, that brokerage accounts often come with maintenance fees or take a cut of any profits you make from your investments.
Can I Use My LLC to Invest in Stocks?
Absolutely, an LLC can dive into stocks, bonds, ETFs, and mutual funds. Typically, this happens through a brokerage account.
Can an LLC Open an Investment Account?
Yep, just like a person, an LLC can open up an investment account.
LLC Formation Companies
Considering using an LLC formation service to kickstart your business? Check out how the top services stack up in terms of pricing, quality, and what they offer. Of course, we always recommend doing your own digging to figure out which provider fits your needs the best.