How to Set Up an LLC for Investing

A limited liability company (LLC) is often used to hold and protect investments. This might be done by a single investor or a group looking to pool their funds. An LLC benefits investors mainly because of the personal liability protection it offers its owners, known as members. 

Setting up an LLC for investing is much like setting up an LLC for business, but with a few key differences. Read on to learn exactly what’s involved in forming an LLC geared toward investing. 

What Is an LLC?

In addition, an LLC is a “pass-through entity” in taxes, meaning that the LLC itself is not taxed. Instead, income passes through the company to the LLC members, who report it on their tax returns. 

LLCs also offer flexibility in management, as there are few requirements regarding organizational structure. 

An S-Corp has pass-through taxation, so if an LLC owns a share of the S-Corp, S-Corp profits will pass through to the LLC. However, if the LLC has an owner who is not required to file U.S. taxes, that income would pass through the S-Corp, then through the LLC and to the owner, and would not be subject to taxation. 

Most securities brokerages and other investment providers will allow you to purchase investment instruments under your LLC’s name. These investment tools include:

• Stocks, bonds, and mutual funds
• Real estate
• Certificates of deposit
• Ownership interest in other businesses, such as another LLC

Retirement funds such as IRAs and 401Ks can generally not be owned by an LLC.

Steps to Setup Your LLC For Investing

The operating agreement is the main difference in setting up an LLC for investment rather than a business. It will need to specify details about how the investment process will work, as detailed in the section below. 

If you want to use the LLC for investments and business, you can, but if other members are involved, it can get complicated, and the operating agreement will need to cover details about both. So it’s best not to blend the two purposes and instead form separate LLCs for investment and doing business. 

Details of how to set up your investment LLC are as follows:

1. Select a Name for Your LLC

When setting up an LLC for investing, your LLC name is not as important as if you were setting up an LLC for a new business since you won’t be marketing your LLC. It would help if you still chose a name that’s not being used by any other businesses. You can check name availability on your state’s website, usually the Secretary of State’s. 

2. Select a Registered Agent

Most states require that you appoint a registered agent for your LLC. A registered agent is a person or company authorized to accept official correspondence on behalf of your investing business, such as legal, tax, or financial documents. 

A registered agent ensures your business stays in compliance with state laws.  In most states, a member of the LLC can be the registered agent, or you can choose an individual that meets your state requirements. Generally, the requirements are that the registered agent:

• Be 18 years or older
• Have a physical address in the state 
• Be available during regular business hours 
• Be registered to operate in the state, if it’s a business

Many business owners hire a registered agent service to ensure all important documents are received and addressed promptly. A registered agent service also offers convenience. 

If you choose to be your registered agent, you’ll have to be available at your registered agent’s address during regular business hours. However, a registered agent service will allow you the flexibility to run and grow your business wherever you need to be. 

3. Determine Your Management Structure

Members or managers can manage LLCs. In a member-managed LLC, members handle all management duties. In a manager-managed LLC, non-member employees oversee operations and management duties. 

Note that with a manager-managed LLC, a member can be a manager, but only in cooperation with another manager who is not a member. 

LLCs used for investing are generally managed by the members who handle all investment activities. Some, however, appoint a financial professional as the lead manager. 

Some states require that when you register your LLC with the state, you declare whether your LLC will be member- or manager-managed, so be aware that you may need to make this decision before you file. 

4. File Necessary Documents with Your State

In most states, the document you need to file to make your LLC official is the articles of organization. In some states, it’s called a certificate of organization or formation. 

Generally, you can file the document online, usually on the Secretary of State’s website. The document requires your business name, address, registered agent information, and sometimes member or manager information. 

Some entrepreneurs use an LLC formation service like ZenBusiness to handle this step. It saves time and ensures the process is done correctly. 

5. Determine Your Tax Status

As mentioned above, LLCs are pass-through entities, which means income passes through to the member or members. If the LLC has only one member, it’s taxed as a sole proprietorship. If the LLC has more than one member, it’s taxed as a partnership. 

However, LLCs are unique because they can elect to be taxed as a corporation if the members decide it makes financial sense. This is done by filing an election form with the IRS. In addition, you can choose to be taxed as a C-Corp or an S-Corp.

C-Corp status means income is taxed at the current rate for corporations (21% as of late 2022), which is lower than the usual individual taxpayer rate. But keep in mind that C-Corp shareholders – who are members in the case of an LLC – must also pay taxes on their distributions. This is called double taxation. 

However, members are subject to self-employment tax in an LLC taxed by default as a sole proprietorship or partnership. Once such LLC switches to being taxed as a corporation, self-employment taxes no longer apply. 

Similarly, self-employment taxes do not apply to members with S-Corp status, which is the main advantage of electing S-Corp status. 

With S-Corp status, members are generally paid as company employees, which means more accounting and payroll expenses. Therefore, S-Corp status is only beneficial when the self-employment tax savings are greater than those additional expenses. 

6. Draft an Operating Agreement

Most states do not require an operating agreement, but it’s a very important document, particularly for an LLC that will be used for investing. It defines members’ ownership percentages of profit allocations. Those are the most important elements of the operating agreement, but it should also include the following:

• Each member’s rights and responsibilities
• Management structure and roles 
• Voting rights of each member
• Rules for meetings and voting
• What happens when a member sells their interest, becomes disabled, or dies

Since your LLC will be set up for investing, the operating agreement should contain several additional provisions. 

• How much each member contributes initially for investment purposes and how much will each member continue to contribute, and when will those contributions occur?
• The LLC’s expected type and diversification of investments. For example, you might invest 40% in aggressive mutual funds, 30% in income funds, and 30% in real estate.
• How will real estate transactions be handled in purchasing and distributing ownership.
• Who will choose investments and how? A member, a vote of all members, or an external financial advisor may do this.
• Whether the portfolio will need to be reviewed periodically to determine if the diversification of the investments needs to be adjusted.
• The assets will be purchased through what investment provider and which members or managers are authorized to make the purchases.
• The allocation and distribution of gains and losses to members.

7. Get Your Employer Identification Number (EIN)

The IRS uses an EIN to identify your company. It’s used for tax filing purposes. An EIN is required if your LLC has more than one member or hiring employees. Obtaining an EIN requires applying on the IRS website.

The IRS rules for obtaining an EIN are as follows:

8. Start Investing!

For mutual funds and most other investments, you’ll need to open an account with an investment brokerage, like Charles Schwab or E*Trade. You’ll need to provide the broker with a copy of your articles of organization or formation document, your EIN, and your operating agreement.

Annual Reporting

Most states require an annual or biennial report to verify you’re still doing business. These can generally be filed online. A small fee usually applies and varies by state.