Investing with an LLC
Previously we have written about using an LLC to invest in Real Estate. However, there are many situations outside of real estate investing in which it makes sense to use the LLC business formation to make investments in company shares, bonds, ETFs and even non-traditional assets such as cryptocurrency. Investing with an LLC can range in simplicity from very simple to quite complex depending on the application and who is involved. It is important to approach the formation of the LLC with care, preferably relying on a local attorney who understands the specific requirements of your state and who has extensive experience in business law.
The LLC Operating Agreement
An LLC operating agreement is a document that describes what is permissible and not permissible with an LLC. The strength of using an LLC for investing comes from a well-thought out and professionally drafted LLC operating agreement. This is especially true if there are plans to include multiple people or parties in the LLC.
One important provision of an LLC operating agreement might be one that describes how individuals can sell their shares in the company. A well drafted LLC operating agreement may, for example, prohibit members from selling shares in the LLC without the written permission of the other members. This keeps third parties from suddenly obtaining ownership of the LLC and maintains the ownership structure, at least until all parties agree to change it.
When an LLC is used as an investment vehicle, the Operating Agreement is similar to a capital markets deal prospectus. It can and (should in many cases) define how the money in the LLC will be invested. One example would be a requirement that no more than 50% of the LLC’s funds can be invested in stocks.
Another important provision is one in which members are required to make regular payments to the LLC. Similar to an investment club, you may require that each member contribute a certain dollar amount per month to the LLC as a means of keeping each member vested.
LLCs for Family Offices
If there are a substantial amount of assets and businesses that are to be jointly owned by members of a single family, then it could be advisable to put these into an LLC with an appropriately drafted operating agreement. In such cases it is also typical that a manager would be hired to direct the LLC.
This can be highly effective for families of extraordinary net worth. However, it can be quite expensive to manage an LLC made up of various subsidiaries, even more so one that is managed by a dedicated employee. An experienced business and estate attorney can advise whether an LLC would be an appropriate and cost-effective vehicle for a given family’s investments.
LLCs for Joint Investors
Setting up an LLC might be the ideal solution for jointly investing in a real estate property, securities, businesses or a combination of assets. In the past, many LLC’s were created as investment clubs that allowed members to pool their money into a single stock and bond portfolio. This used to help people make bulk investments without having to pay individual commissions to agents and brokers. Nowadays, there are many options that individuals can avail that allow for investing without the need to pay commissions. Therefore, LLCs formed for joint investors are not as common today as they were in the past. Still, there are some situations where several people or companies may form a jointly owned LLC to pursue a specific line of investment.
It is very important that a lawyer with experience in joint venture agreements draft the operating agreement in these cases. Boilerplate versions of LLC operating agreements do not consider the unique needs of multiple party LLCs. Even if a legal professional drafts an LLC operating agreement, it is still necessary for individual parties to retain their own counsel as they will need to be advised on whether certain clauses in the LLC operating agreement are in their best interests. Negotiations in the planning phase before an LLC is formed can avoid costly and bitter disputes much later on.
LLC’s for Foreign Investors
Investing with a Florida LLC whether in real estate or other assets is advantageous for many non-resident alien investors. We have covered many of the issues related to that matter here.
Tax Implications of the LLC formation
First and foremost, all potential members of a future LLC should consult an experienced CPA to determine whether an LLC business formation is right for tax purposes.
It is important to know that the IRS does not recognize LLCs as standalone entities. Instead, the IRS considers LLC to be “pass through entities” where profits and losses made by the business are declared on the individual (i.e.: usually the personal) returns of the LLC’s members. The operating agreement again becomes important in determining how a multi-member LLC divvies up its earnings for tax reporting purposes. For example in the case that the operating agreement provides for a 75/25 ownership split all revenue and losses from the LLC would be split 75/25 between the members and declared on their individual returns. In the case of using an LLC for investment purposes, capital gains, losses, and dividends would be divided based on the split in the operating agreement.
It is worth noting that using an LLC for investment purposes is seen differently by the IRS than using it to house normal business activity such as selling goods and services. Many tax deductions that could be taken for “businesses” are not extended to LLCs used solely for investment purposes. Therefore there are no inherent tax benefits or disadvantages to an LLC in itself as the tax implications depend on the individual statuses of the members.
“Negotiations in the planning phase before an LLC is formed can avoid costly and bitter disputes much later on.”
LLC Fees and Administrative Requirements
Depending on your state, using an LLC for investment purposes can require the filing of an annual report document as well as the payment of annual fees. Here in Florida these fees and the administrative burden is relatively small compared to other states. For example, at the time that this article was written the Florida annual filing fee for an LLC was $150 whereas the cost in California was around $800.
South Florida Law
Company formation is an important business process for which the advice of a legal professional is highly recommended. South Florida Law assists business and individuals in establishing the right type of business for the types of organization they are establishing. The correct entity for any given need may be a sole proprietorship, for profit corporation, non-profit organization, partnership, trust company or one of several other entity types.
Remember: every matter requiring business law advice requires its own unique legal assessment. Looking to register a new business for investment or other purposes? Call us on (954) 900-8885 or use our contact form for a free consultation.