How to Set Up an LLC for Investments

Often, people set up LLCs for purposes of investing with other people to pool money, or just for their own individual investments. Reasons to do so include pass through taxation, personal asset protection, and an LLCs structural flexibility. If you are considering an LLC for your investments or to pool money with others, you need to make sure that you do so correctly.

What is an LLC?

An LLC is an increasingly popular business structure for startups, offering liability protection for ownership and greater flexibility than a corporation, particularly in terms of taxes. The LLC itself does not pay taxes. As a “pass-through” entity, income passes through the business to the owner or owners, who report it on their personal tax returns. An LLC is created by filing paperwork with your state, and nominal fees are involved.

An LLC offers its owner or owners, who are called members, considerable flexibility in terms of management. You can choose your management and operational structure and decide how you want to be taxed. Your LLC can have a single member or multiple members, all of whom have personal liability protection, meaning your personal assets are not at risk if you cannot pay business debts or are involved in a lawsuit.

What Kinds of Investments Can You Have in an LLC?

Many investment providers will let you invest through your LLC. The structure of the LLC is very flexible, so you have many investment options, including:

• Stocks or mutual funds
• Fixed income assets such as bonds or certificates of deposit
• The ownership of other business entities
• Real estate

Generally, LLCs cannot hold assets linked to retirement accounts such as IRAs or 401Ks.

Does an LLC Have Shares?

The answer is no, an LLC can have neither shares nor shareholders, because, unlike a corporation, it cannot issue stock.  

If you’re in a high-growth industry and plan to raise money from investors, a corporation may be your best option in the long run. Investors can give you capital in exchange for shares, which is a fairly simple process. Often, investors will not invest in LLCs simply because of the fact that they cannot issue shares.

How to Set up an LLC for Investing

Forming an LLC for investments is basically the same as for any business.

1. Choose Your State

You will first need to choose the state that you plan to do business in. The LLC process and requirements vary by state, so visit your state’s website and research the process, fees, and form requirements. Generally, you can form your LLC with an online application. If you plan to have physical locations in more than one state, you will need to register a foreign LLC in the states where you will do business other than your home state.

2. Choose Your LLC Name

Your business name is extremely important, as it should be memorable and reflect your brand and services. Once you’ve chosen a name, you’ll need to make sure it’s not already taken by searching on the website of your state’s website and those of other states in which you plan to do business. You should also check the US Patent and Trademark Office website to make sure the name has not been trademarked.

3. Choose a Registered Agent

A registered agent is the person or company that sends and receives legal documents on behalf of your LLC. The registered agent can be a member of the LLC, or you can choose a third party such as an attorney or a company that offers registered agent services. Most states require you to have a registered agent who is a resident of the state where you do business or a company authorized to do business in your state.

4. File Articles of Organization

The articles of organization is the document you fill out to form your LLC. These forms vary by state but can generally be filed online. You’ll need to fill out the LLC name, the name and address of the registered agent, the names of the LLC owners, and in some states, the way the LLC will be managed. Fees are generally around $100.

5. Create an Operating Agreement

When forming an LLC for investments, particularly with other people, the operating agreement is critical and should specify:

• How much each member is contributing initially for investment purposes and how much each member will continue to contribute on a regular basis, if that is the plan.
• The LLC’s expected type and mix of investments. For example, you might decide to invest 60% in stocks and 40% in bonds.
• How real estate transactions will be handled in terms of purchasing and allocating ownership.
• The criteria for choosing investments – who will choose and how. This may be done by a member, or members, or a specified financial advisor.
• Whether the portfolio will need to be periodically rebalanced, such as to maintain the 60/40 mix.
• Through what provider the assets will be purchased and who is authorized to make the purchases.
• The allocation of gains and losses to members.
• What happens to assets if a member leaves or dies.

It is a good idea to have an attorney’s help when creating your operating agreement to ensure you cover all bases and protect members and avoid future issues.

6. Obtain an EIN

Your Employer Identification Number (EIN) is like a social security number for your business, enabling the IRS to identify your business easily. It is also known as a Federal Tax Identification Number (FTIN), or sometimes for corporations a Tax Identification Number (TIN).

An EIN is required if your LLC has more than one member, if you plan to hire employees, or if you choose to have your LLC taxed as a corporation.

The EIN contains information about the state in which the company is registered and identifies taxpayers required to file business tax returns. It is used by employers for filing taxes and is normally required for businesses when they open a business bank account.

7. File Annual Reports

Your state may require you to file annual reports for your LLC which may involve a fee. Check your state for requirements.

8. Start investing

You’ll need to open a brokerage account and give the brokerage your Articles of Organization, your operating agreement, and your EIN.

What Happens at Tax Time?

Since LLCs are pass-through entities, the LLC itself will not pay taxes. Income and losses will be passed through to the members according to what is stated in the operating agreement and reported on the members’ personal tax returns.

The 20% tax reduction that applies to many LLCs through the Tax Cuts and Jobs Act does not apply to LLCs aiming to invest because they are not officially viewed as running a business.

In Closing

Creating an LLC for investments purposes is increasingly, and often a good choice for those looking to pool funds. Just be sure your operating agreement is detailed and clear. It is highly recommended that you hire an attorney to help you draw up the agreement so that all members understand the terms and protection. Once you have your LLC in place, you can start making investments and letting your hard-earned money work for you!