Set Up an Investment LLC in 4 Simple Steps

A limited liability corporation (LLC) separates the personal assets from the company assets. If the LLC should fail, only the business assets can be attached – limited liability for the owner. An investment LLC is a company formed to manage investments. These include stocks and index funds, bonds, CDs, and real estate. An investment LLC won’t keep you from losing money in the market. But only the company can lose its shirt.

How an LLC works

An LLC is what you get when you blend a corporation and a limited partnership. An LLC offers the following benefits:

  • Asset protection
  • Pass-through taxation
  • Limited compliance rules
  • Less meeting requirements
  • Less strict management requirements

The members of an LLC are bound by a standard operating agreement (SOA.)  The agreement will identify members and describe how dividend distribution. It includes profit and loss allocations and the parameters for dissolving the company.

With an investment LLC, the SOA expands to define financial requirements for members. It includes a minimum investment and recurring funding for the company. It should also articulate the diversification strategy for assets. Some members may be more risk-averse than others, favoring Modern Portfolio Theory. Bold investors welcome risk and will look for a more aggressive tact. 

When you’re joining an LLC, make sure you’re comfortable with the approach. A blend of viewpoints is helpful, but strongly held positions can cause conflict among members.  If you’re starting an LLC, give some thought to the investment strategy the company will follow. Be sure the members are aware and willing to follow it.

Starting an Investment LLC

States regulate how businesses are set up and filed.  You define how the members will participate and how investments are made.

1. Preparation

Find out what your state requires to set up a new LLC. There Filing fees and the type of documentation you need to include will be unique to each state.

You can set your LLC up in a different state. Delaware offers favorable conditions for new businesses. They offer low taxes, an easy filing process, and affordable filing fees. Nevada changed its laws to be more business-friendly, following the Delaware model.

Research your ideal portfolio

Take some time to consider the mix of investments for the company. If you’re not familiar with investing, educate yourself on the options. Don’t limit yourself to stocks. Investments can include real estate, commodities, bonds, and index funds.  Diversification is a proven strategy to keep your portfolio balanced.

Socially Responsible Investing (SRI) is another way to design your portfolio. SRI investments align with the value system of the investor. SRI investors often focus on issues like climate change, gender, and racial equity. Companies that support causes they oppose (best example, tobacco) are avoided.  You can invest in existing funds or create your own portfolio.

Portfolio design is important. It drives how you set up your operating agreement for investors. Some states require the OA to be included in your filing, others let you file but with a waiting period. Still, others make it optional.

But it’s not optional for the founder of a successful investment LLC.

Operating Agreement

The operating agreement provides standard information on the company. The articles of organization includes names of members and roles of officers. An investment LLC adds information for its investors and members. It provide members with the criteria for joining and staying in the group. It will layout the minimum investment and the recurring costs of contributions to the LLC, if any.

The agreement provides clarification about the investment strategy and portfolio management. An officer in the LLC will keep it current and alert members to any changes. The agreement helps to minimize member attrition, dissension, or even lawsuits. It may include:

  • Investment strategy for buying and selling assets
  • Process criteria for choosing new assets
  • When and how to rebalance the portfolio
  • Authorization to make trades for the company
  • How and when of dividends distribution
  • Allocation of gains and losses
  • Restrictions on some types of assets
  • Procedure for a member selling their share in the LCC
  • Schedule for reporting portfolio’s profits or losses

Organization Structure

An investment LLC typically has multiple members. The group pools their money to increase the scope of their investments and their returns. Though that’s the norm, it’s not a requirement. A single person LLC is a possibility. There are tax implications for both models.

LLC members are not limited to people. Members can include corporations, other LLCs, or even foreign entities. (Note there will be different reporting requirements for foreign entities. There is no limit on the number of members in an LLC.

Registered Agent

Every LLC must identify a registered agent. This individual or business is designated to receive government correspondence and compliance documents. They recieve notices from process servers. They have no operational authority over the LLC.

2. Choosing Members

choosing members of LLC

The people you choose to join your LLC need to be familiar with your operating agreement. The investment strategy, the initial membership investment, and any recurring contributions in particular. The operating agreement applies to all members, regardless of relationship.

Working with Family 

Many people point to the Walton family of Walmart fame, as a family-owned LLC. Don’t need to tell that a success story is not the norm. Working with family will either make the company easier to run or harder.

How well does the family get along? Will everyone have sufficient income to participate? The dynamics of family relationships need to be thoroughly examined. Disagreements will affect more than just the finances.

On the positive side, family members trust each other – no outside vetting. They provide each other support and may add investment expertise in the mix.

Friends, Colleagues & Other LLCs

It’s helpful to have members with a diverse skill set. You may want to look for people with some investment expertise. Based on your investment strategy, it helps to include people with relevant industry knowledge. A friend who works in solar power or a tech LLC that’s developing AI tools, a physician treating Alzheimer’s. It’s all about relevance to the investments.

Business partners need to be vetted. Decide on what that vetting process looks like. What information you need before accepting someone as a member? A credit report and background check on a friend may feel uncomfortable but… Make sure you’re upfront about what’s required and apply the same vetting process to everyone.

Membership should be contingent on receipt of the initial minimum investment. Make sure your operating agreement outlines how to handle issues with missed payments

3. Filing your LLC

There are still some decisions to make. You need to choose a name for the LLC. Most states require you to add LLC as a designation at the end. As far as taxes go, a multiple-member LLC has two options. A single person LLC has only one.

Tax Structure

The IRS looks at an LLC, any LLC, as a pass-through organization. The profit or loss passes to the owner and members. Depending on the end of year finances, the members will pay tax or take a write off on their income taxes. The IRS taxes this as a partnership model.

An LLC does not issue paychecks. Standard FICA withholding are paid as a self-employment tax. In 2021, the Social Security tax rate is 12.4% and the Medicare tax rate is 2.9%. Currently, the IRS allows you to deduct half of that tax from your total income.

An LLC with multiple members has the option of taxing the LLC as a corporation. Based on the current tax code, a corporation pays a lower rate on the first $75,000 in business income. The corporation can write off business expenses as well. If your LLC is well-funded, this will reduce the tax burden. Stock options also become available to members under the corporation designation. The base rate for U.S. corporate tax is currently 21%.

But if you’re set up a single person LLC, there is no corporate option. The LLC will is treated as a sole proprietorship for tax purposes.  You can write off business expenses, expenses like office space, phone, and mileage.  You will pay self-employment tax and can subtract half from your gross income.

The tax rates for sole proprietors are the same as people who work as employees. The tax is progressive – segments of income are taxed at different rates.

  • 10%: $0 to $20,000
  • 20%: $20,001 to $50,000
  • 30%: $50,001 and above

The tax on $75,000 of income would fall into the 30% tax bracket. Based on the marginal rates, you’d owe $15,500 before any deductions.

State Taxes

Most states follow federal guidelines for taxing LLCs, but they don’t have to. Check the requirements in your state when you’re setting up your LLC or decide to file out of state. Delaware has become a hub for LLCs by offering lower tax rates.

Register your LLC 

Review your paperwork to make sure everything is complete. The Secretary of State is the normal place to registering your business. Most have the procedure online, but not all. The filing fees will vary by state but they will all have them.  There are also companies to do the filing for you, like icfile.com or nolo.com. You provide the basic information, they do the rest. Those charges are in addition to the state’s filing fees.

4. LLC Maintenance

Now that your LLC is registered, there are ongoing tasks for the business.

Employer Identification Number (EIN)

Once the LLC is registered, you need to get an EIN for the business. Your LLC needs to be located in the United States to get an EIN. The person applying must have a valid Social Security number or another EIN. As you see on the IRS website, the application must be completed in a single session. Have everything you think you might need to apply to avoid starting over.

Annual Reports

States require an annual report to make sure the LLC is operating in compliance with the law. Not all states ask for them annually, some mandate a report every two years instead.  An annual report is a simple form including most of the information in your original filing.

It should update changes, if any, to the names and addresses of members and the registered agent. Most states provide copies of an annual report form on the Secretary of State website. Even if there are no changes, the form needs to be filed in accordance with state law. If it’s not received on time, a they charge a late fee. If it’s not received at all – the LLC will be dissolved.

As with LLC registration, some companies will file your annual report.

Filing fees for annual reports vary. In North Carolina the filing fee is $200, in California, it’s $800. The annual average cost is $91 and the cheapest filing fees by state are $40. Delaware, touted as an optimum location for LLCs, does not require an annual report. Instead, they charge an annual Alternative Entity Tax, currently set at $300.

Quarterly Taxes

Once you’re set up as a business, the LLC will receive forms to pay taxes quarterly.  The Estimated Tax Form is a way to offset a big surprise on when your taxes come due.

quarterly tax form

For LLCs choosing the corporation model, the pre-paid tax will further offset the tax owed. For a sole proprietorship or partnership LLC, quarterly tax payments apply to the income taxes of the member.

Quick Facts

There are some instances where an investment LLC must register with the SEC.  You can find more information here or speak with an attorney.

If you plan to seek funds from venture capitalists, an LLC is not their favored model. They typically do not make investments in pass-through organizations. Using the corporation taxation model may offset it, but you are better served by creating an S corp.

Not all investment clubs are LLCs. Some are just clubs.

Investment LLCs

LLCs are easy to set up. They don’t cost much, and they protect your personal assets from business losses. Choosing your members and envisioning your portfolio are the most complicated pieces.

For an investment group to be successful, the operating agreement must be clear, thorough, and well written. Every member must agree to those conditions, including the owner. Once members have signed on, provided their funds, let the investing begin.

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