Setting up an LLC for investing is a safe way to build a group of investors and take advantage of the liability protection and tax benefits given to LLCs. Investing as an individual brings added risks to your personal finances and leaves you solely responsible for raising the money to invest. We go over what you need to know to set up an LLC for investing.
In this article, we'll cover:
- Limited Liability
- Tax Benefits
- Portfolio Diversification
- How to Set Up an LLC for Investing
- LLC Holding Company vs Investment LLC
Limited Liability
Limited liability is the legal barrier separating your personal belongings and life from your business dealings. An investment LLC offers its members or owners limited liability protection against being sued and for their investments, loans, and debts. For example, if your investment LLC suffers a financial loss, your personal financial accounts are not affected and only what you’ve invested is affected. The limited liability extends to all assets invested in by the LLC. Each member is also protected by the LLCs limited liability and asset protection.
Read our Asset Protection Guide for more information.
Tax Benefits
Investment LLCs are taxed as pass-through entities by default, but they are also flexible in their tax classifications and can be taxed as corporations. Pass-through taxation means the LLC’s losses and profits are passed through to the LLC’s members and reported on individual tax returns. If you’re the sole owner of your LLC, you’ll file taxes as a sole proprietor, while multi-member investment LLCs file as partnerships. You are, however, able to elect to have your investment LLC taxed as a C-corp or S-Corp.
S-Corps are still taxed as pass-through entities, but they do not have to pay a 15.3% self-employment tax. As an S-Corp, your LLC will also not have to pay federal corporate income tax. C-corps pay federal and state corporate income taxes. Unlike S-corps, C-corps pay its members in distributions after paying corporate income taxes on the company’s earnings. While C-corps technically pay taxes twice on their earnings, they don’t have to pay taxes on money kept in the business. For investment LLCs, this means what you invest back into the business from your earnings isn’t taxed, allowing for faster growth.
Check out our LLC Taxes Guide to learn more about filing taxes as an LLC.
Portfolio Diversification
Investment LLCs can be used as a way for a group of investors to pool their money together and invest in larger and varied assets, stocks, bonds, and properties. Buying an apartment or house to use as an Airbnb without using an investment LLC leaves you open to not only increasing your personal debt, but having to pay for the purchase all yourself. Using an investment LLC and collecting funds from multiple members lessens the financial burden and allows you to purchase more than you would be able to alone.
LLCs can’t invest in retirement accounts, but they can invest in:
- Real estate including properties and land
- Stocks, bonds, CDs, and funds
- Precious metals
- Cryptocurrency
- Other LLCs, corporations, and businesses (especially start-ups)
Learn how to buy a house with an LLC.
How to Set Up an LLC for Investing
Setting up an LLC for investing is very similar to forming a regular LLC. You’ll need to:
- Pick a formation state
- Appoint a registered agent
- Choose an LLC name
- File formation paperwork with the state
There are some important differences in how you set up an investment LLC from a regular LLC. You’ll want to pay special attention to your operating agreement, need to obtain a legal entity identifier, and have to open a brokerage account for your investments. Let’s explore those topics below.
Learn more about setting up an LLC.
Operating Agreement
Your investment LLC operating agreement should document:
- Initial investments or capital contributions made by all owners of the LLC
- Operational guidelines for how your LLC will distribute earnings and transfer ownership
- Investment strategy outlining how the LLC will invest its money and if there are restrictions on investments
- Required regular contributions made by members
- How votes and quorum are obtained for making changes to the LLC
- Process for bringing on new members or how current members can leave the LLC
- Distribution of gains and handling of losses
- Who has trading and investing authority in the LLC
The main difference between regular LLC operating agreements and investment LLC ones is that in an investment LLC operating agreement, you will need to outline guidelines for how your LLC will invest and who can invest LLC funds. In a regular LLC operating agreement, you focus on how your LLC is operated and the management structure without consideration of how it will invest.
Check out our LLC Operating Agreement.
Getting a Legal Entity Identifier
A legal entity identifier or “LEI” is a public code used to reference your investment LLC as a legal entity able to invest and engage in other financial transactions. You’ll use your LEI to open a brokerage account and a bank account. To get an LEI for your investment LLC, you’ll need to locate an LEI issuing organization accredited by the Global Legal Entity Identifier Regulatory Oversight Committee. You’ll pay a registration fee and a yearly fee to maintain your LEI.
Opening an LLC Brokerage Account
A brokerage account for your LLC’s investments gives you added protection in trading, buying, and selling assets. A brokerage account is the account you’ll use to buy, sell, and transfer investments you’ve made with the LLC. You can only open a brokerage account once you’ve formed your investment LLC with the state and drafted your operating agreement. Only people authorized and specified in the operating agreement can open a brokerage account for the LLC.
To open a brokerage account, you’ll need to provide your:
- Operating agreement
- LEI number
- Articles of Organization
- Minimum deposit
- Contact information
- Business name
You’ll want to open a brokerage account with a broker that allows for LLCs to set up accounts for investing—not all do! Some brokers will allow you to open up your account online, but if not, you’ll need to find a physical location and go in with the above materials and information ready to provide.
LLC Holding Company vs Investment LLC
An investment LLC is similar and often interchangeable with a holding company because they both operate as nontraditional LLCs. A holding company is a business used for holding assets for a company. Unlike investment LLCs, holding companies are often managed or owned by an operating company that does all of the regular business.
If you’re interested in setting up an LLC for investing, you’ll want to use an investment LLC over a holding company. However, if you already have assets and investments you want to be held in an LLC without using the LLC to buy or trade, a holding company is your best option.
Learn more about LLC holding companies.
Investing with an LLC FAQ
All states allow for the formation of investment LLCs. You will need to find a broker in your state that allows for LLCs to open brokerage accounts.
Yes. A single-member LLC will offer you the same liability protection without the ability to pool funds.
Usually not. In most states, there is no limit on the number of members in an investment LLC.
Yes. You will need to open a brokerage account and get an LEI number to legally engage in trading, selling, and buying stocks, bonds, and other investments.
Depends. In your operating agreement, there should be specific designations for which members are allowed to buy, sell, and trade and what approval, if any, they’ll need.
A brokerage account is used specifically for investing (buying, selling, and trading stocks, bonds, and other assets), while a business bank account is used for placing and holding cash.
Yes. Since you’ve filed your Articles of Organization with the state, you’ll need to comply with your state’s annual report requirements for LLCs. Most states require LLCs to file an annual report each year, but some states like Alaska, require initial reports to be filed the same year you form your LLC.
Yes. Unlike regular LLCs, your investment LLC needs to have an operating agreement that outlines exactly how your LLC will invest, the initial and monthly contributions of each member, and who has the authority to open brokerage accounts and make investments for the LLC.
Yes. All LLCs need to have registered agents appointed to accept service of process and other legal mail on the LLCs behalf. You’ll need to have one listed on your Articles of Organization.
You can use an LLC to invest in property, land, metals, cryptocurrency, and even other businesses. You just can’t use an LLC to invest in a retirement account.
LLCs are taxed as pass-through entities by default, but you can elect to have your investment LLC taxed as a C-corp or S-Corp.
