Have you ever wanted to invest in private market investments with a friend, family member, or business partners?
Or maybe you’ve wondered if there is a convenient way to add a layer of privacy – and protection – for your investment holdings?
How about a way to potentially reduce your taxes?
If so, setting up a Limited Liability Company (LLC) for investing might be worth considering.
Today, we’ll talk about the three main benefits of using an LLC to invest in private market investments… But first, let’s talk about one of the most infamous quotes in asset protection…
“Own nothing but control everything”
You may not realize this, but many wealthy individuals (and families) 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.
Bill Gates invests through Cascade Investment LLC, which controls his remaining stakes in Microsoft (along with other investments he has).
Why do they choose to invest this way?
A few important reasons…
- First… a limited liability company is designed to limit personal liability.
Most people don’t know this, but if you are listed as the owner of an asset – whether it’s real estate, a private business, or even a motor vehicle – you can be held liable for any damages caused or debts incurred.
If the asset owner had unlimited liability, this would mean that in the event of a lawsuit, all of their other assets could be at risk.
But with a limited liability company, any assets held outside of the LLC are shielded; only the assets inside of the LLC are exposed.
This means that if things go awry – and the company is forced into bankruptcy – the owners can walk away (relatively) unscathed.
Why? Because thanks to the LLC, they don’t have ownership over the asset. The LLC owns the asset, they own the LLC – along with all of the ownership rights and voting privileges – and therefore, they control the asset.
Now, to be clear, there are limits to the protections an LLC might offer. If the LLC gets sued for fraud, it can be possible to “pierce the corporate veil” and get access to the owners’ personal assets.
For the record, we are not Estate Planning Attorneys nor Tax Professionals. Do not act solely on this information alone, and seek the advice of a professional to determine if this is right for your situation.
But when used within it’s proper legal framework, the use case for an LLC is compelling: Reduce (or potentially remove) the liability of ownership while maintaining control of the assets.
- Second… it might be a useful estate planning tool.
Benjamin Franklin allegedly said “in this world nothing can be said to be certain, except death and taxes.”
While I’m sure you’re not excitedly planning for your eventual death…
If you have a distaste for paying more taxes than legally required, now is a good time to start thinking about the taxes your heirs will pay when you pass… especially if you have a sizable estate.
If you want to transfer assets to your children, grandchildren, or other family members—but you are concerned about gift taxes or the burden of estate taxes your beneficiaries will owe upon your passing—an LLC might help you:
- Control and protect assets during your lifetime,
- Keep assets in the family, and
- Reduce taxes owed by you or your family members.
When using an LLC as an estate planning tool, you would create a family LLC. All of your heirs or beneficiaries would become members while you keep control over the entity.
You can also establish who will take over managing control over the LLC when you’ve passed, making it a powerful estate planning tool for not only you but your family as well.
- Third… it may provide a legally binding framework for how investing decisions are made.
The strength of using an LLC for investing comes from the operating agreement; a document that describes what can and cannot be done in the LLC.
This is a key element for setting – and enforcing – how funds will be invested (and for resolving conflicts between members).
For example, you might want to put in a provision that determines if – and under what conditions – people can sell their shares in the LLC.
This will prevent changes in the ownership structure without all members agreeing; Since many LLCs are setup to manage family wealth, this keeps the ownership of the LLC in the family.
You also might decide on certain rules about how funds will be invested, and how funds will not be invested.
Having a solidified plan and structure makes it easier to have consensus across all parties.
This plan is also called an Investment Policy Statement; it is a legal requirement for all professional investment managers to have, and they can be held liable if they don’t stick to it.
Here’s what you need to do to set up an investment account for your LLC on Equifund
Before we begin…
As part of our AML/KYC compliance policies, we must verify the LLC is in good standing.
At the very last step of the account creation process, you will need to upload the following documents before we can process any investments made from your LLC investment account.
- Articles of Incorporation
- Operating Agreement (Signed by all members and officers)
- Proof of Address within 90 Days (i.e. a utility bill, bank statement.)
I’m also going to assume that you’ve already set up your individual profile. If you haven’t, go here and do that now!
Once you’ve set up your individual account, you can add additional accounts to your profile.
To do this, click on the down arrow in the upper right hand corner next to your name (1), then hover your mouse over the “+Add New Account” field (2), then click “Entity” (3).
Once you do, you’ll be taken to a screen that looks like this…
Please enter your first name, last name, and title exactly as it appears on your corporate documentation (i.e. Articles of Incorporation).
You will also need to enter your phone number and date of birth.
For the section marked “Entity Information,” please enter the entity name, address, state/region of formation, and country, exactly as it appears on your corporate documentation (i.e. Articles of Incorporation).
If for any reason, you’d like to create a separate login/password to access any additional investment accounts, you can check the “Create a password for this account user.”
Once you’ve done this, the screen will refresh and you will be taken to the homepage of your new account. You will still need to enter some additional information to complete the setup process.
The Contact Information and Entity Information will already be populated. You will need to complete the section marked Identity Verification.
Please note that any information you entered from your “Individual Account” will not transfer to this one.
This means you will need to re-enter your social security number, nationality, and country of residence.
You will also need to specify the Tax Entity Type.
Please be aware than an LLC is a what’s called a “pass-through entity.”
The IRS treats one-member LLCs as sole proprietorships for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a separate return from your individual return with the IRS.
As the sole owner of your LLC, you must report all profits (or losses) of the LLC on Schedule C and submit it with your 1040 tax return.
The IRS treats co-owned LLCs as partnerships for tax purposes. Co-owned LLCs themselves do not pay taxes on business income; instead, the LLC owners each pay taxes on their lawful share of the profits on their personal income tax returns (with Schedule E attached).
Each LLC member’s share of profits and losses, called a distributive share, is set out in the LLC operating agreement.
If the IRS considers you as either a sole proprietor or partnership, please select the “LLC” option from the drop down menu.
However, you can choose to file taxes as an S-Corp or C-Corp. If this is the case please select “Corporation” from the drop down menu.
Once you make your selection, a new box will appear called “Tax Identification #.” Please enter whatever number you use to file tax returns for this entity (most commonly an EIN, a 9-digit number with a format of XX-XXXXXXX).
Please note that your tax identification number will be visible only to you on this screen. It is not visible to anyone else!
To confirm the additional account has been set up, hover over the upper right hand corner.
You can switch back and forth between all of your accounts from this menu.
Final Thoughts
If you’re interested in setting up an LLC for your investment activity, This is definitely not the time to be “pennywise and pound foolish” by trying to do this yourself.
Not only are there upfront costs associated with opening the LLC, there are annual costs required to maintain it.
Please talk to a qualified professional about this to determine the proper course of action for your situation.
Your early-stage experts,
Equifund.com
