Setting Up an LLC for Investing

Setting Up an LLC for Investing

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
  • Ongoing fees including Annual Reports, renewing licenses and permits and possible franchise taxes
  • Accounting fees for preparing and filing tax returns

There are some tax implications of running an investment LLC, but the good news is you’re not likely to pay more taxes than if you were investing by yourself. Here’s why:

  • Investment returns and other income earned by an LLC “pass through” to each individual member’s tax returns based on the ratios set in the Operating Agreement
  • Taxes are due as normal and paid on the earnings shown on each member’s tax returns
  • Investment LLCs are not able to take advantage of the 20 percent tax reduction introduced by the Tax Cuts and Jobs Act, since holding investments in an LLC is not considered to be running a business

It’s Easy to Start an Investment LLC

Here at Incfile, we’re experts in helping you start an investment LLC, and we make the whole process quick, easy and painless. Here’s what you’ll need to do:

  1. Gather information on all the owners/members who will want to be part of the LLC
  2. Search for and choose a unique business name for your investment LLC
  3. Provide an official address
  4. Assign a Registered Agent for the LLC
  5. File Articles of Organization to officially form your LLC

For more information, we have some very helpful state-by-state guides to starting 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.

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Paul Maplesden

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.
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