Limited liability companies (LLCs) are the most common incorporation option for small businesses; they’re inexpensive to form, offer valuable protections and can formalize and legitimize business relationships. What many people don’t realize, however, is that LLCs aren’t just for traditional businesses – they’re also an ideal structure for aggressive investors who want to guard their assets.
If you’re an active investor, it’s worth considering whether an LLC could benefit you. By purchasing under an LLC, you can stick to your current investment strategy while gaining these three valuable protections.
Group investing
When forming an LLC, you have several options in terms of ownership and control. You can form the organization as sole proprietor or as a partnership. When using an LLC to invest, then, you have the option of including others in your investment plan so you can invest in partnership with your family. This is a great way to build future savings for children or grandchildren, or to invest with your spouse or siblings for retirement.
Investing with family or friends can be a valuable strategy for nervous investors or those who respond emotionally to market fluctuations. With other investors on board, you have the ability to balance each other’s impulses and pool knowledge to make smarter decisions. You can also purchase higher value stocks or further diversify your holdings because you have a larger funding pool to invest.
Cut your losses
Another reason to consider investing in stocks under the framework of an LLC is that this incorporation model is specifically designed to minimize your losses. In Texas, for example, as in most states, LLCs make it so that any liabilities incurred by your business must be considered legally separate from your personal assets. Though no one wants to be in that situation, LLC rules can keep your other assets safe if you find yourself facing losses on the investment end. Just be certain to maintain two different funding streams with discrete accounts.
Reduce your tax load
As an individual, you pay taxes on almost all forms of income unless explicitly exempted in the tax code. That includes your traditional sources of income, earnings from stock dividends and other capital gains. If you choose to purchase stocks through an LLC, however, you can minimize your tax obligations.
LLCs don’t pay traditional taxes, but rather report annual earnings and losses via form 1065. Meanwhile, earnings are passed on proportionally to members in the LLC. In this regard, LLCs may not have a strong advantage over individual investments, but they are more profitable than investing through other types of corporations. If you invest via any business model that pays taxes rather than merely filing profit and loss reports, then your investment earnings will face double taxation. Avoid that model whenever possible.
When to avoid LLC investing
Is there ever a reason to simply invest as an individual rather than through an LLC when this modest form of incorporation offers such substantial benefits? Yes – but only in very specific circumstances.
Avoid forming an LLC if your primary form of investment is real estate rather than stocks. While investing in stocks via an LLC can help reduce your liability, purchasing real estate this way can mean you face higher interest rates, lose out on special financing opportunities and can’t take advantage of the tax deductions typically available to individual buyers. Even if you’re flipping homes, turning your investments into a formal business can cause financial headaches.
Beyond investing in property, LLCs are largely advantageous for individuals and groups hoping to enhance their market power, so why not consider embracing the formal label for yourself? Beyond a small fee and a company name, very little else about your investment process need change, yet you’ll reap new financial benefits.
