Setting Up An LLC For Investing (2024)

Have you ever wanted to invest with a partner, or with an investing club? Or maybe you have a bunch of family members that want to pool their money together to invest. One of the best ways to do this is by setting up an LLC for investing.

An LLC is a limited liability company, and it can be a vehicle for a lot of purposes. One of the more interesting uses of an LLC is to allow groups of people to pool their money together to invest. It can also be used to invest in other things, such as real estate.

With the recent tax changes, many people have been excited about the idea of setting up an LLC to potentially save money on taxes. But can you? Or is what you're seeing on social media a myth? We'll discuss the tax implications below.

Here's why and how you might want to consider setting up an LLC for investing.

Why Setup An LLC For Investing

The strength of using an LLC for investing comes from the LLC operating agreement. The LLC operating agreement describes what can and cannot be done in the LLC. As such, it works very well for setting up an investing vehicle for multiple people or parties.

For example, a common provision in the LLC operating agreement is how individuals can sell their shares in the company. Typically, when you setup an LLC for investing, you forbid other members from selling their shares in the LLC without other member's permission. This will prevent changes in the ownership structure without all members agreeing. Since many LLCs are setup for families, this keeps the ownership of the LLC in the family.

Another common provision is defining how the money in the LLC will be invested. Similar to a mutual fund prospectus or ETF prospectus, you can define how the LLC will invest in the operating agreement - maybe requiring at least 60% of the funds invested in stocks. Having a solidified plan and structure makes it easier to have consensus across all parties.

Finally, some operating agreements may require members to make regular contributions to the LLC. If you are setting up an LLC for an investment club, you may require that each member contribute $50 per month to the LLC. This keeps all club members vested in the club and the LLC.

Famous Family LLCs For Investing

You may not realize this, but many wealthy individuals use LLCs to invest. For example, Wal-Mart's largest shareholder is Walton Enterprises LLC. This is the LLC formed by the Walton family to control ownership of Wal-Mart. The Walton Enterprises LLC has 6 known members, the heirs to Sam Walton's empire. Combined, the Walton family is worth almost $150 billion. However, most of this wealth is tied up in the LLC. In turn, the LLC owns assets like Wal-Mart, and several other smaller companies.

Bill Gates is another famous individual that holds most of his wealth in an LLC. He owns Cascade Investment LLC, which controls his remaining stakes in Microsoft and other investments that he makes.

Where To Setup And Invest With An LLC

Anyone can setup an LLC for investing pretty easily. They key is to make sure that all members of the LLC agree on the operating agreement, which are the terms by which the LLC will operate.

There are two ways to approach this - depending on if you're investing with others, or investing for retirement.

Investing With Others

If you want to setup an LLC for investing, I recommend Nolo. It's the company that I used to setup my LLC and I've been very happy with them. Their prices are reasonable, and their support is great. It will take you about an hour to setup your LLC for investing with Nolo. Then, Nolo will file your paperwork with your state, and you should be official in a few weeks (or months depending on your state).

Note:Some states have fees associated with the LLC. For example, in California, you have to pay at least $800 per year to maintain your LLC. Be sure you're aware of your state requirements when getting started. You want to make sure the value of the LLC (in both state fees and additional tax preparation costs) are worth actually starting one.

Once you have your LLC paperwork, you need to open a brokerage account in the name of the LLC.

I recommend using Charles Schwabfor this.They are a full-service brokerage firm that has solid online options and it's easy to get help!

Open an account at Schwab here.

To get started at Schwab, you simply select "Other Account Type" and the "Limited Liability Company". They will then ask you for the information from your LLC operating agreement, and they will also want a copy of it when you're done applying.

This is also an account that you typically can't just open online, but you can get the investing account open very quickly once you send in your LLC operating agreement. I would estimate you would be good to go in about a week. When I opened our account, it took about 2 hours to get the paperwork done, and the account was opened by the end of the week. We were also able to get a signup bonus for our initial deposit when we opened the account.

Want other options for companies to open an LLC for investing at? Check out this list of the best deals for opening up an brokerage account: Best Online Stock Brokers.

Investing For Retirement

If you want to invest in non-traditional assets (like real estate, crytpo, etc.) and you have a retirement account, you can still do it - but you just do it through an LLC.

This is especially helpful for individuals with a solo 401k or large IRA.

In this case, you should look into 401k or IRA providers that offer checkbook control of your investments - meaning they will setup an LLC that is owned by your IRA or 401k.

When it comes to investing your retirement savings in alternative assets, your choice of provider can make all the difference. My top recommendation? The Entrust Group. With a rich history spanning more than four decades, they bring unparalleled expertise to the table. Their user-friendly Entrust Client Portal is an industry standout, and they go the extra mile by providing extensive educational materials on investing retirement funds through an LLC. Check out The Entrust Group here >>

You can also check out our full list of self-directed IRA providers here.

Using An LLC For Real Estate Investments

One of the most common reasons to use an LLC for investing is to invest in real estate. An LLC will protect you from potential liabilities that arise, as well as provide a framework for dividing up the investment ownership of the property.

This can work really well if you plan on owning multiple properties, or if you have multiple investors in one property.

One of my favorite ways to get started with rental properties is through crowd funding. Similar to LendingClub, you can start investing in real estate for as little as $5,000 at platforms like RealtyMogul. Want to do it as a group? Well, then each person can invest - once again saving yourself the DIY headache.

Another similar platform isFundrise. They only have a $10 minimum to get started and offer a variety of options we love as well! Fundrise has really been a great performing passive income investment over the last year!

Both of these platforms allow you to use an LLC to invest, but you'll have to talk to their customer service teams to get started.

The Tax Implications Of Using An LLC For Investments

With all the talk surrounding the Trump Tax Cuts that went into effect in 2018, a lot of people have started wondering if using an LLC would potentially help them with taxes? I mean, who doesn't want to save money in taxes?!?

Important note: I'm not an accountant or tax professional, and I'm definitely not your accountant or tax professional. You should seek the guidance for a tax professional if you have any questions surrounding the tax implications of your investments, business structure, etc.

Okay, with that being said, what are the tax implications of using an LLC for investments?

The IRS doesn't recognize the LLC as an entity - it's pass-through. What this means is, each member reports their share of "whatever" on their taxes as if the LLC doesn't exist. So, if you have 2 people and your operating agreement specifies a 50/50 split, then each person reports their income, losses, dividends, whatever, 50/50.

So, most LLCs used for investing would have capital gains, losses, and dividends. Each would then be allocated to the members per the operating agreement. The members would, in turn, each report the amount on their taxes as if they had received them themselves. As such, each members tax implications would be different.

What about the 20% tax cuts for LLCs? This is a common misconception. The 20% pass-through income deduction is for business owners who own their business in a pass-through entity. So, if you don't own a business, you don't get any deduction. Simply holding investments in an LLC is not owning a business.

So, if you're just investing within an LLC, you don't get any type of special tax treatment. The IRS basically views everything as if the LLC doesn't exist.

What about putting personal assets into an LLC?This is another big TikTok inspired myth. Again, simply having an LLC doesn't suddenly make personal expenses business expenses. There is no reason to put personal assets into an LLC - and trying to claim personal expenses as a business deduction is tax fraud.

Alternatives To Using An LLC

So, if you don't get any special tax treatment for using an LLC, why would you use one to invest?

Well, it all comes down to investing with other people. If you're going to pool your money with other people, you want some organization and agreement to how things get done.

So, the common scenarios for using an LLC are:

• An Investment Club
• Real Estate
• Family Business/Money

Let's talk about each one and some alternatives for each:

Investment Clubs

Investment clubs where you actually pool your money are dying. The reason? Investing is so cheap these days! There's no reason to pool your money.

It used to be a huge cost savings to work together when investing. Let's say you had 20 members in an investing club and you all agree to buy a specific stock. If you didn't pool your money, each member would have to pay a commission - $9.99 per trade. So, as a group, the investing club would lose almost $200 in fees. If you pooled your money, there would be just one trade - costing $9.99. That would save the collective group $190.

Now, with services like M1 Finance, which allows you to invest for free, there's no reason to pool your money. The club can create a portfolio, and each member of the club can execute the changes at NO COST!

Check out the other apps to invest for free here.

Real Estate

Real estate is still a great scenario for using an LLC, especially if you're going to be allocating income and expenses differently than ownership.

However, there are alternatives to how you own real estate (though, not as good). Specifically, you can hold title on the property directly as joint tenants. This takes care of ownership, but doesn't help with income and expenses.

If you are just a partnership, you can divide it. But, if you get more than 2 people, you probably want an LLC. Plus, an LLC is great for liability purposes.

Family Money

Just the like Walton's, if there is a significant amount of assets, including a business, and many family members that "own" it, it can make a lot of sense to put this into an LLC with a clearly definite operating agreement and manager.

This is expensive - so this is typically reserved for large estates. If you just have a little money to invest, it really doesn't make sense to go through the hassle of an LLC.