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Everything You Need to Know About Using an LLC for Investing

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61% of Americans say they own stock, which is up from 56% in 2021. In fact, the number is at its highest since 2008.

People are working smarter, not harder for their income, which is why they’re turning to investing. If you’re doing the same, then consider stepping it up another level by investing with others. One way to do this is to form a limited liability company (LLC) so you’re all owners. 

Does this sound interesting to you? Then here’s what you need to know about using an LLC for investing.

What Can You Invest In?

The sky’s the limit when it comes to investing with an LLC. On top of traditional stocks and bonds, you can also put your money in private business investments, cryptocurrency, precious metals, real estate, and even other LLCs or businesses.

Do note that the one thing you can’t invest in is retirement accounts.

Why Set Up an LLC for Investing?

There are so many choices out there for business structures, so what is it that makes LLCs so appealing? Below are reasons why you should use an LLC for investing.

Limited Liability Protection

Limited liability protection is perhaps the most significant advantage of forming an LLC for investing. It means that the personal assets of the LLC’s owners are typically protected from the debts and liabilities of the business.

If the LLC faces a lawsuit or incurs debts beyond its assets, creditors usually can’t come after the personal assets of the members. This means that your homes, cars, and personal bank accounts are safe.

Pass-Through Taxation

As a pass-through entity, an LLC doesn’t pay taxes at the business level. Instead, the profits and losses “pass through” to the individual tax returns of the LLC’s members.

This means that the income generated by the LLC is taxed only once at the individual level, which helps you avoid the double taxation that occurs with C corporations. Also, it can simplify tax reporting for LLC owners and may result in tax advantages, especially if the LLC generates losses that can be used to offset other income.

If you’re wondering about S corporations, these are also pass-through entities. However, you won’t have to pay self-employment or federal corporate income taxes.

Flexibility in Management Structure

Corporations may have a more rigid management structure with directors and officers. But LLCs offer flexibility in how they’re managed.

You can choose to have a single-member LLC (one person manages the company) or a multi-member LLC (several members share management responsibilities). In addition, LLCs have the option to be member-managed or manager-managed.

Investment Portfolio Protection

Holding investments within an LLC can provide an additional layer of protection for your portfolio. 

In the event that one of your investments faces legal issues or incurs liabilities, having it held within an LLC may shield your other assets from being affected. This separation can help protect your personal wealth from being at risk due to the actions of a single investment.

Easier Transfer of Ownership

LLC ownership interests are typically easier to transfer than ownership shares in a corporation. If you have a multi-member LLC and one member wants to sell their ownership stake or transfer it to another party, this process can usually be accomplished without the need for extensive legal formalities.

This flexibility in ownership transfer can be advantageous, especially in partnerships or estate planning scenarios.

Other Things to Keep in Mind

Forming an investment LLC may seem like a great idea, but ultimately, it comes with some drawbacks as well. Here are some things to consider.

The Costs

Setting up an LLC involves fees, as with starting any business. For example, you’ll have to pay for filing and appointing a registered agent.

There will be ongoing costs too. In this case, you’ll have to pay annual reporting fees.

How Complex the Situation Is

Obviously, investing with other people will be a significantly more complex situation than investing alone. You’ll have to deal with more legal and regulatory requirements. This can be a headache to deal with, especially if you don’t have proper professional help.

Conflicts May Arise

Part of the complexity of LLC investing is the potential for conflicts. Not only do you have to agree on what you should invest in, but also how to distribute the profits. This means it’s essential that you pick compatible business partners before starting your LLC.

Holding Company vs Investment LLC

These two LLC types are very similar, but there’s a key difference you should know before deciding on one: LLC holding companies are focused on owning or managing assets, while investment LLCs are focused on managing investment portfolios and generating financial returns.

In most cases, forming an investment LLC is the better choice. But if you want a more hands-off approach to investing and you already have assets and investments, then you might want to form a holding company instead.

How to Start an Investment LLC

If the above information has convinced you to use an LLC for investing with other people, then you may be wondering about how to start an investment LLC. In general, you’d follow our thorough LLC formation checklist, as the process is pretty identical for LLCs in all industries.

To make things easier though, you should use our business registration service. It’ll only take a few minutes to fill out our form, and then we’ll take care of everything else. Plus, our services are very affordable, so it won’t put a huge dent in your pocket.

Try an LLC for Investing

If you want to put your money to good use and you want to do it with other financially-savvy people, then forming an LLC for investing may be a wise decision. It does come with some cons, but there are numerous other pros. If you carefully select your partners, it’ll be a less risky endeavor too.

So if you have disposable income and want to see your nest egg grow, consider this route. It won’t be that challenging, especially if you have the right professional help.
Sign up with Business Anywhere today if you’re interested in starting an investment LLC. We can be your registered agent too.

About Author

Picture of Rick Mak

Rick Mak

Rick Mak is a 30-year veteran businessman, having started, bought, and/or sold more than a dozen companies. He has bachelor's degrees in International Business, Finance, and Economics, with masters in both Entrepreneurship and International Law. He has spoken at hundreds of conferences around the world during his career on entrepreneurship, international tax law, asset protection, and company structure. Business Anywhere Editorial Guidelines

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