Should You Register An Llc To Invest In Crypto?

Investing in crypto as an individual is very different from investing as a business. A Limited Liability Company (LLC) is a type of business structure that offers liability protection and other benefits for business owners. While it is not necessary to register an LLC to invest in crypto, it can be advantageous for crypto professionals as it limits financial liability in the event of lawsuits and debts.

Pros and cons of starting an LLC for crypto

Pros of starting an LLC for crypto

• An LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.
• LLCs are also affordable, highly flexible (from a tax point of view), and can make your cryptocurrency business seem more credible.
• LLCs provide personal liability protection, meaning your personal assets (e.g. car, house, bank account) are protected in the event your business is sued or defaults on a debt.
• Cryptocurrency businesses, like crypto mining firms, consultants, trainers, equipment retailers, and miners, can benefit from liability protection.
• LLCs have options to customize their tax structure, allowing businesses to use the best tax strategy for their circumstances.
• LLCs can write off tax losses from hacks and scams, which individuals cannot do.
• Losses can be used to offset past or future capital gains. Unlike individuals, C-corps can carry back capital losses to offset capital gains.
• LLCs can increase your business's credibility and consumer trust.

Cons of starting an LLC for crypto

• Incorporating an LLC can be complex and costly.
• You may need to hire an attorney to help select a business structure and create the entity.
• Tax returns can become more complex, as you need to file taxes as a corporation.
• Depending on the state in which you incorporate, you will have to pay for a registered agent and annual franchise fees.
• Unwinding a corporation can be a lengthy process.

How to start a crypto LLC

A Limited Liability Company (LLC) is a popular legal structure for businesses as it provides liability protection and other benefits for the business owners. LLCs are taxed as pass-through entities, meaning the LLC doesn't pay taxes but the owners are required to report the profits or losses on their individual tax returns.

Research and Plan:

Determine the specific objectives and activities of your crypto-related business, such as cryptocurrency trading, mining, or investing. Select a unique and appropriate name for your LLC, ensuring it complies with state regulations.

Choose a State of Formation:

Decide which U.S. state you want to form your LLC in. Some states, like Wyoming, are known for their favorable crypto regulations. You will also need to designate a registered agent in your chosen state, who will be responsible for receiving legal documents and notices on behalf of the LLC.

Prepare and File LLC Formation Documents:

Prepare and file the Articles of Organization with the appropriate state agency. This document officially creates your LLC and includes essential information such as the LLC's name, address, and members. You will also need to draft an Operating Agreement, which outlines the management structure, ownership percentages, and operating procedures of the LLC.

Obtain an EIN (Employer Identification Number):

Apply for an Employer Identification Number (EIN) from the IRS. This unique identifier is necessary for tax purposes and opening a business bank account.

Register with State Authorities:

Depending on the state, you may need to register with state revenue departments or other regulatory agencies for tax purposes or to obtain necessary licenses.

Open a Business Bank Account:

Choose a bank or financial institution and open a separate business bank account for your crypto LLC. This separation of personal and business finances is crucial for maintaining liability protection.

Obtain Necessary Licenses and Permits:

Research and identify any specific licenses or permits required for your crypto business, such as money transmitter licenses or other regulatory approvals, depending on your activities and location.

Secure Cryptocurrency Wallets and Accounts:

Set up secure cryptocurrency wallets and exchange accounts to handle your crypto transactions.

Comply with Tax Obligations:

Understand your tax obligations at the federal, state, and local levels. Consult with a tax professional who specializes in cryptocurrency to ensure accurate reporting and compliance.

Maintain Records and Accounting:

Keep detailed financial records, including income, expenses, and transactions related to your crypto LLC.

Comply with Reporting Requirements:

Stay informed about any reporting obligations, especially if your state or the federal government introduces new regulations, such as the Corporate Transparency Act (CTA).

Starting and maintaining a crypto LLC requires careful planning and adherence to legal and regulatory requirements. It is always recommended to seek guidance from a qualified advisor.

LLC vs. C-Corporation vs. S-Corporation

There are several differences between LLCs, C-Corporations, and S-Corporations in terms of their structure, taxation, and suitability for different types of businesses.

LLC (Limited Liability Company)

An LLC is a type of legal structure that determines how a business is owned and operated. It offers liability protection and certain benefits to the business owners. LLCs are taxed as pass-through entities, meaning that the LLC itself does not pay taxes, but the owners are required to report the LLC's profits or losses on their individual tax returns. This can get complicated for single-member LLCs, as the IRS does not recognize a single-member LLC as an entity separate from the individual.

LLCs provide flexibility in terms of management structure and do not have strict meeting and documentation requirements like corporations. They can also have an unlimited number of owners, who are referred to as "members." However, LLC owners pay taxes on all net profits from the business, and self-employment taxes are typically higher than employee taxes.

C-Corporation

A C-Corporation, or C-corp, is an independent legal entity owned by its shareholders, with unlimited growth potential. C-corps are subject to double taxation, meaning that the corporation itself is taxed, and any dividends or profits passed on to shareholders are taxed again as personal income. C-corps have stricter management and reporting requirements than LLCs and S-corps, and they are more expensive to set up and operate.

C-corps are typically better suited for larger companies or those seeking venture capital or public funding. They offer the advantage of flexible profit-sharing among owners and the ability to provide substantial benefits packages to employees.

S-Corporation

An S-Corporation, or S-corp, is a pass-through entity, meaning its taxable revenues are not taxed at the federal level but are passed through to the owners' and shareholders' personal tax returns. S-corps avoid double taxation, and owners pay lower self-employment taxes. S-corps have a limit of 100 shareholders, who must be U.S. citizens or legal residents, and there can only be one class of stock.

S-corps are commonly used for small business activities and provide liability protection for owners. They are often chosen for the tax benefits, but the strict compliance standards and limitations on ownership may be drawbacks for some businesses.

In summary, the choice between LLC, C-Corporation, and S-Corporation depends on the specific needs and goals of the business. LLCs offer liability protection and flexibility, C-corps allow for unlimited growth and investor participation, and S-corps provide tax advantages and liability protection for small businesses.

New LLC beneficial owner information (BOI) reporting requirements

The Corporate Transparency Act (CTA) ushers in new reporting obligations for many entities, including LLCs, from January 1, 2024. The CTA is a legislative framework that targets money laundering and illicit activities that exploit shell corporations and similar entities.

Under the CTA, "reporting companies" must disclose their Beneficial Owner Information (BOI) to the Treasury Department's Financial Crimes Enforcement Network (FinCEN). This disclosure includes details about the company itself and its beneficial owners. A beneficial owner is an individual who either directly or indirectly exercises substantial control over a company or owns/controls at least 25% of its ownership interests.

For existing reporting companies, the deadline to furnish BOI to FinCEN is January 1, 2025. However, companies established or registered on or after January 1, 2024, have a 30-day window from their formation/registration date to report. Any changes to beneficial ownership or exemption status must be reported within 30 days.

FinCEN proposed extending the deadline for certain reporting companies to 90 days for initial BOI reports, giving them until January 1, 2025, to comply. This extension aims to reduce the burden on reporting entities and promote compliance.

Non-compliance with the CTA's reporting obligations attracts civil and criminal penalties, including monetary fines and imprisonment, for both individuals and reporting entities.

Insurance considerations

While an LLC structure offers limited liability to its owners, protecting their personal assets from lawsuits and creditors, it does not protect the business finances. Therefore, it is recommended that all businesses, including LLCs, get insurance to protect their commercial properties and finances against theft or accidents.

The type of insurance an LLC will need depends on the industry, location, and size of the business. Here are some common types of insurance that LLCs may need to consider:

• General liability insurance protects your business against bodily injury and property damage claims filed by customers and other third parties.
• Business owner's policy is a package that includes general liability insurance, business property insurance, and business interruption insurance. This type of insurance helps cover lost income if your business has to pause operations due to a covered loss.
• Professional liability insurance protects your business against claims that your business made a mistake that resulted in a loss to your customer. This type of insurance is also known as errors and omissions insurance or E&O insurance.
• Commercial auto insurance provides coverage if you or your employees use a vehicle in the course of doing business, including accidents in personal vehicles while being used for work-related purposes.
• Workers' compensation insurance is legally required in most states if you have employees. It covers medical bills and lost wages if an employee is injured at work or becomes ill due to a work-related accident.
• Commercial property insurance helps protect your LLC's owned or rented physical location, equipment, and inventory.
• Business income insurance covers lost income if your business cannot open due to covered property damage.

The cost of LLC insurance varies depending on the business's unique needs and the types of coverage required. It is recommended to get quotes from multiple insurance providers to find the best coverage at the best price.

Frequently asked questions