Guide to Setting up an LLC for Investments
Limited Liability Companies, How They Work, and How to Create One
You can invest without owning a single stock or bond. Owning a limited liability company (LLC) is a popular way to hold ownership stakes in a family business or startup.
There are unique benefits and protections afforded to LLC owners which make it easy to understand why they are so highly favored. As a new investor, it's important for you to understand why you should care about LLCs, their different types, and the tax implications.
This collection of LLC articles is your guide to limited liability companies, beginning with an overview of the term and including reasons and techniques for you to start one yourself.
What Is an LLC?
A limited liability company combines the benefits of a corporation with the benefits of a limited partnership. LLC owners are called members, not partners, but are treated like partners for tax purposes. But as with corporations, their liability is limited. The most notable advantages of LLCs include:
- Pass-through taxation
- Asset protection
- Limited compliance rules
- Less rigid structures for management
The meeting requirements for LLCs are also far fewer than for corporations, and they're easier to set up, too.
If LLCs have sparked your interest, take some time to learn the pros and cons, as well as other considerations, before deciding to buy equity in one or form your own.
What to Know About LLC Operating Agreements
Limited liability companies are governed by a contract that the investors sign prior to the company's formation. This contract is known as an LLC operating agreement, and it provides vital information about the company's policies, priorities, and procedures. Many states require it to be presented with their application for incorporation. Here are just a few of the important provisions you are likely to see in a standard LLC operating agreement:
- Ownership and members
- Profit and loss allocations
- Dividends and distributions
- Dissolution plans
Before investing through an LLC, review the operating agreement so that you can anticipate future scenarios. A good attorney can help.
Why so Many Investors Love Nevada LLCs
Over the past 20 years, the state of Nevada has been working hard to attract businesses and corporations to incorporate within its borders and set up shop. Its pro-business campaign was a success. Many lawyers and financial advisers now espouse the benefits of using a so-called Nevada LLC to hold family businesses, investments, or other assets—even if these businesses are based elsewhere. The benefits include:
- Asset privacy
- Favorable tax laws
- Shareholder anonymity
The Many Benefits of Delaware LLCs
A Delaware LLC also offers would-be business owners a lot of advantages. In fact, investing through a Delaware LLC is often a top choice for many professionals, and had been before Nevada changed its laws to compete with them. Here are just a few reasons you may want to consider incorporating your business or holding your investments through a Delaware LLC:
- Low taxes
- Asset privacy
- Low annual filing expenses
- Easy start-up processes
- Asset protection from creditors
Your business doesn't need to be based in Delaware to take advantage of the benefits.
How Families Can Invest Together With an LLC
To take advantage of economies of scale, families will often pool their money together to form small businesses, invest in shares of stock, bonds, or mutual funds, develop real estate, or partake in any other business or investment venture. How these family LLCs operate will be defined in their operating agreement.
Walton Enterprises, LLC, is one example of a famous family limited liability company. Through this LLC, members of Sam Walton's family control Wal-Mart Stores, Inc., a regional bank named Arvest, and other investments. Find out if a family limited liability company is the right choice for you.
Another Option: Limited Liability Limited Partnerships (LLLPs)
To help make limited partnerships as appealing and useful as limited liability companies, roughly half of the states in the U.S. have allowed for the creation of an entity known as a limited liability limited partnership or LLLP. It functions similarly to an LLC but has its own unique advantages and disadvantages. Find out how this new legal entity works and whether it is right for your family business or investments.