Investing Through an LLC: Everything You Need to Know
Investing through an LLC is a way for a group of people to put their resources together and invest.3 min read
Investing through an LLC is a way for a group of people to put their resources together and invest. Their investments may include different areas, such as real estate or startup businesses.
It's rather easy for anyone to set up an LLC for investing. It's important that all members in the company agree on the operating agreement because it lays out the terms under which the LLC will be run. After setting up the LLC, you'll then open a brokerage account in the company's name.
Investing Through an LLC: Useful Provisions
Some people think about investing with a partner or through an investing club. They may have family members who are interested in pooling together their money to invest. Investing through an LLC is one of the best ways to do this. A limited liability company can be used for many purposes, and one of them is allowing groups to pool their resources.
It's easier for all parties to agree when you have a solid plan and structure in place. An LLC's operating agreement sets the basis for using the company as an investment tool. This agreement outlines what can and can't be done in the business, so it works well for setting up an investment vehicle.
For instance, operating agreements typically contain a provision that outlines how members can sell their shares. You may prohibit other members from selling their LLC shares without permission from the other members. This prevents changes in the LLC's ownership structure that all members don't agree on. Because many LLCs are family-owned, this keeps ownership of the business in the family.
Another common provision in an operating agreement for an LLC used as an investment tool is detailing how to invest the money. You may decide to invest at least 70% of the funds in stocks, for example.
You may choose to include a provision in your operating agreement requiring members to make regular contributions to the business. If your LLC is set up for an investment club, you may require all members to contribute a set amount per month, such as $100. Requirements like this keep all members vested in the business.
Common Ways to Invest Through LLCs
Many people use an LLC to invest in real estate. Operating an LLC protects them from potential liability, and it provides a framework for dividing the ownership in the property. Investing through an LLC this way works well when you have multiple investors in a single property or if you want to own multiple properties.
Another good use for investing through an LLC is for families who wish to pool together their money to invest alongside family members. The terms in the operating agreement outline how family members can benefit, and they may use the LLC to invest in any of the following:
- Real estate
- Startup companies
- Mutual funds
You can include the provisions you want in your LLC's operating agreement, so you might decide to prohibit individual family members from selling their company shares unless they have permission from all other members. Not only does a provision like this force them to stay vested in the company, but it also takes away the worry that someone they don't know or like now has some ownership in the business.
You can include provisions in your operating agreement that say each grandchild must contribute a set amount to the business. You may also include a provision that limits investments to specific types of assets. These may be rental properties in a certain area or stocks that have dividend yields over six percent.
While many people operate LLCs because they want to run their own small business and keep their personal and business assets separate, others create LLCs because they want to invest their money. It's a good way for families to pool together resources and maintain control of a company, while enjoying the benefits of personal liability protection.
Because it's easy and inexpensive to set up a limited liability company, most people can do it themselves without legal assistance. You can check with your state's Secretary of State office (or similar agency) for more information.
If you need help with investing through an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.