If you want to invest money alongside other people, one of the best things you can do is to create an investment LLC. An LLC is a simple type of business entity that lets you put certain rules and regulations in place with the other members of your investing club. Setting up an LLC is fast and easy, and LLCs provide a good structure for the owners and members to pool together money for investment purposes.
What You Can Invest in Through an LLC
The LLC is a versatile company structure, and many providers will allow you to invest through the business. Typical types of investments might include:
Stocks, exchange traded funds (ETFs) and mutual funds
Bonds, certificates of deposit (CDs) and other fixed-income instruments
Real estate and development
Ownership of other businesses and entities
Note that LLCs cannot typically be used to hold investments in 401(K), IRA, ROTH or other retirement plans or vehicles.
LLC Operating Agreement: Why It Matters for Investing
The main benefit of investing through an LLC is because you can set up rules, regulations and other procedures for all your investors and define them in your LLC Operating Agreement, which delineates how your business is run. For a standard LLC, an Operating Agreement would cover areas like voting, compensation, accounting practices, selling or leaving the business, dispute resolution, bringing other people into the business and similar areas.
For an investment LLC, the Operating Agreement will still contain all of these areas, but it can also go a step further. It can define various aspects of how members of the LLC (and the LLC itself) fund and makes investments. For example, an Operating Agreement could lay out:
How much money each member is required to put into the LLC each month for the purpose of investing
The mix of investments and type of portfolio that the LLC will hold, including the relative weight of stocks, bonds, ETFs, mutual funds, real estate and other areas
How and when to rebalance the LLC portfolio and holdings
Criteria for buying and selling financial assets
Restrictions on investing in certain types of assets
How gains and losses from investments will be allocated to LLC members and owners
Research and other criteria for selecting new assets for investment
Who has authority to make trades on behalf of the LLC
What happens to a member's investments if they decide to leave the LLC
Reporting on the returns, gains and losses of investments
An Operating Agreement is ideal because it means everyone is working under a common set of rules, regulations and standards when it comes to investing. The agreement removes ambiguity and reduces the likelihood of misunderstanding or future problems with investing.
Working With Providers That Allow LLCs to Invest
Not every financial provider or asset type is right for an LLC — you will want to seek out financial providers that allow LLC investing. Most major brokerages do allow LLCs to buy and sell investments, though you will typically need to share your Operating Agreement with them.
Check brokerages like Fidelity, TD Ameritrade, Charles Schwab or Vanguard to see what their requirements are for investing via an LLC.
Property Development and Real Estate Investing via an LLC
LLCs are popular vehicles for holding real estate and property development investments. This is because:
LLCs offer liability protection, which can be useful if you’re developing property
LLCs keep your personal and business finances separate, which is especially helpful when investing in real estate
In some states, you can create a Series LLC and have one part of the business for each property you’re developing or managing
Some specialized real estate portfolio providers will also allow you to invest as an LLC, giving you a wide exposure to various types of property.
Costs and Tax Implications of an Investment LLC
There are some costs associated with creating and running an investment LLC, which can include:
The cost of creating the LLC in the first place. This may include using a company formation service, as well as state fees for setting up an LLC
You will also want to create your Operating Agreement. We have a guide to creating a standard LLC Operating Agreement, and we recommend checking with an attorney about how to structure the specific investment sections. Once you have the agreement together, you will need to have it approved and signed by anyone making investments through the business.
Paul is a freelance writer, small business owner, and British expat exploring the U.S. When he’s not politely apologizing, he enjoys hats, hockey, Earl Grey Tea, mountains, and dogs.