LLC for Investing Guide (2024) - MarketWatch (2024)

Updated:Jan 17, 2024

While most people starting a limited liability company (LLC) do so to create a small business, there are other reasons one might choose to form an LLC. The management flexibility, tax benefits and protection of personal assets offered by LLCs make it a great vehicle for investment opportunities.

Since there can be more than one member, it’s often the business entity of choice when multiple people are looking to invest in something as a group. Whether you’re looking to start an LLC to invest in real estate, stocks or a startup, this article is your all-inclusive guide to learning more about investment LLCs and how you can benefit from starting one.

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Whether you want to invest with a group of friends, start up a family investment vehicle (e.g., multi-member LLC) or house your own investments (e.g., single-member LLC) starting an LLC can help create that layer of separation between investment and personal accounts. Creating a distinct legal entity (like an LLC or corporation) is the only true way to ensure personal liability protection. This is especially important if you plan to invest in high-risk ventures or real estate.

No matter who you choose to be a member in your LLC, it’s essential that you create an LLC operating agreement — even if one isn’t required by your state. The agreement should define important membership details (e.g., transferring membership, expected financial contributions and voting procedure) and management structure.

Taxes

When considering an investment LLC, your main focus should be on the potential tax implications. All LLCs benefit from pass-through taxation, meaning the LLC members pay taxes on the business’ income instead of the entity itself. However, that doesn’t necessarily mean you’ll be saving money by investing with an LLC instead of an informal structure, like a sole proprietorship.

When entrepreneurs start an LLC for a business, the members pay income tax on the money made through self-employment. However, an LLC’s pass-through entity status is less important when using it for investment purposes. When using an LLC as an investment vehicle, any income generated through stocks, real estate or other asset exchange will be considered capital gains and the members of the LLC will still need to pay taxes to the IRS.

The process for claiming capital gains is not necessarily more complex than the claiming process for other types of income — all you have to do is file the appropriate tax return. However, the tax rate fluctuates depending on how much money you earned on the asset and how long you’ve held it.

If you’re looking to organize a group of individuals for an investment opportunity, creating an LLC is probably the most cost-efficient way to do so. Each member will contribute a share of the funding, then the income generated by the LLC will pass down to the members and each will individually pay taxes on their share. In this scenario, the LLC operating agreement is essential to establish how distributions are allocated — especially when investors are non-family members (e.g., a group of investors or friends).

Detailing terms and requirements in writing is important to make sure investor-members are on the same page about what’s expected with their membership and to hold them accountable to contribution schedules.

Using an LLC to house assets and investments for family members is a common practice for those looking for a creative estate planning solution. For this type of LLC, there’s usually a single manager (can be a member or a non-member) handling the LLC’s money and making financial decisions to generate long-term income.

Opening a trust is usually the preferred method for passing down money to family members and reducing the likelihood that you’ll end up in probate court or paying hefty estate taxes. However, unlike keeping assets in a trust (which has restrictions on who can withdraw and when) LLCs are more flexible and may be better for families who want to access LLC funds sooner rather than later. LLCs also provide enhanced asset protection from creditors and other liability threats.

Since their creation, LLCs have been used to house real estate investments (especially rental property) to keep the investor’s personal assets safe. Since an LLC is a separate entity from the owner/member, only the assets held by the LLC are up for grabs if it ever gets sued or the LLC’s property is foreclosed upon. The member’s personal assets are still protected.

Real property generally holds its value better than other investments and usually comes at a higher price. So, investing in real estate without an LLC to protect your personal wealth can be highly risky. Additionally, if your LLC wants to use its property as a rental there’s always a risk of being sued, if for example, the renter has an accident on the property.

Since income generated by the LLC is passed through the entity, the members need to individually pay taxes on their share of any income and capital gains generated by the LLC. However, there are plenty of write-offs available that can help decrease your taxes. For more information, see our in-depth article about how to use an LLC to invest in real estate.

Just like an individual, an LLC can invest in the stock market. Unlike using an LLC to invest in real estate, opening a brokerage account for investing in stocks, bonds, ETFs (exchange-traded funds) and mutual funds comes with significantly less risk to your personal assets. Unless you’re specifically using an LLC to organize multiple investors, there aren’t many benefits to using an LLC to invest in stocks.

Of course, if your LLC generates income from an already existing business or real estate venture and is looking to make more money on that income by investing in the stock market, that’s a bit different. In that case, you’ll want to talk with a financial advisor about how to enter the market and how to best save money on taxes.

LLCs are created by state statute, which means the LLC formation process varies from state to state. Despite the slight differences, LLCs in all states are required to file articles of organization (also called certificate of formation) and pay the filing fee with the appropriate state office (usually the secretary of state).

All states also require the LLC to designate a registered agent. This agent, who can be an individual or a registered agent service, must be a resident of the state in which you file and will be expected to receive all important state, tax and legal documents on behalf of the LLC.

While only required in a few states, creating an LLC operating agreement is one of the most important steps you’ll take when starting an LLC. This agreement is the only sure way to ensure asset protection and separation between personal and investment money. Creating a separate bank account for your LLC goes together with creating the agreement. You’ll want to document your financial accounting information very carefully so when tax season comes, there are no questions about where funds came from and where they went.

LLC Formation Companies

Are you thinking of using an LLC formation service to start your business? See how the top LLC formation services compare in price, quality and service offerings. As always, we encourage you to do your own independent research to determine which provider is best for your needs.

Legal Disclaimer: This article contains general legal information but does not constitute professional legal advice for your particular situation and should not be interpreted as creating an attorney-client relationship. If you have legal questions, you should seek the advice of an attorney licensed in your jurisdiction.

Authored by: Miranda Riva, J.D. Miranda earned her Juris Doctorate from William & Mary Law School and holds a Tennessee Bar License. Before transitioning to legal content creation, she taught legal research, writing and citations to first-year law students at two different law schools. In her spare time, you can find Miranda hiking through the U.S. National Parks or spending time at the beach with her two Australian Shepherds.

Reviewed by: Joseph Kellman, J.D. Joe earned his Juris Doctorate from the Charleston School of Law. Before transitioning to legal content creation, he worked at a complex civil litigation firm handling class-action, trust litigation and legal malpractice. In his spare time, you can find Joe rooting for the New York Knicks or the Virginia Tech Hokies.