Creating An Investment Llc: A Step-By-Step Guide

Setting up an investment LLC is a popular way to protect your assets and limit your liability. An LLC, or limited liability company, is a separate legal entity from its owners, which means that members can benefit from personal asset protection if the company is ever sued or subject to collections by creditors.

LLCs are typically used by groups of people who want to pool their money together to invest. This could be families, groups of friends, or partners. An LLC allows these groups to benefit from liability protection and tax advantages.

To set up an investment LLC, you will need to:

- Pick a unique name for your LLC

- File Articles of Organization

- Choose a registered agent

- Draft an operating agreement

- Apply for an EIN and open a business bank account

Choosing a business name

Understand State LLC Naming Requirements

Each state has its own rules for naming an LLC, which are usually outlined in the state's Limited Liability Company Act. However, there are three main rules that apply across all states:

• Your LLC name must be unique within your state. It should be distinguishable from other business names on record, and simply adding articles like "the" or "and" is usually not enough to make it unique.
• Your LLC name must include an identifier, such as "Limited Liability Company", "LLC", "Limited Co", or "Ltd. Co.".
• Your LLC name cannot use restricted words, such as "bank", "federal", or "police", which may mislead the public or suggest your LLC is something it is not. Additionally, you cannot include an incorrect entity identifier, such as naming your LLC "Dave's Corporation, LLC".

Brainstorm Your LLC Name

When brainstorming a name for your LLC, consider your brand identity, which is the character and vibe you want your target audience to associate with your business. Here are some approaches you can take:

• Descriptive LLC Names: A descriptive business name accurately describes what your business does. For example, "Jim's Backyard Desert Landscaping, LLC" clearly indicates the type of services offered. While this type of name may lack style or originality, it effectively communicates your business offerings to potential customers.
• Creative LLC Names: A creative business name evokes a feeling or tells a story rather than describing your products or services. For instance, "Pearl & Rose, LLC" could sell anything from cocktail kits to online dating consultations, but the name conveys a western, feminine style. Keep in mind that creative names may require more advertising to explain your business offerings.
• Completely Made-Up LLC Names: You can also choose a meaningless name, such as "Flordlurkle LLC" or "Schmoopz LLC", which is likely to be unique and won't be confused with other business names. However, you'll need to put in more effort to communicate what your business offers and establish your brand identity.

Check Domain Availability and Social Media Presence

Even if you don't plan on having a website, checking the domain availability of your LLC name can help you identify potential competition. Use a search engine or domain name search engine to research your potential LLC name and see if any websites or social media profiles come up with the same or similar names. Check social media platforms like Twitter, Facebook, and LinkedIn to see if your LLC name or variations of it are available.

Lock Down Your LLC Name

Once you've chosen a name that meets your state's naming requirements, it's time to lock it down by reserving, registering, and/or trademarking it. Here are the steps you can take:

• Reserve Your LLC Name: If you're not ready to form your LLC yet, you can reserve your chosen name with the state for a fee, usually between $15-$75, to keep it on hold for a certain period, typically 90-120 days.
• File Articles or Certificates of Organization: When you're ready to form your LLC, file the necessary paperwork, such as articles or certificates of organization, with the secretary of state. The filing fees for this step range from $40-$500, depending on your state. Once processed, your business name is officially registered and off-limits to other businesses.
• Trademark Your LLC Name: You can apply for a trademark to legally protect your LLC name at the state level or federally with the USPTO. State-level trademark protection only applies within that state, while federal trademark protection covers all 50 states but is a more complex and costly process.

Remember, your LLC name should be memorable, unique, and easy to pronounce. It should also reflect your product and brand values and be domain-ready and social media-friendly. By choosing a distinctive and compliant name, you can set your LLC up for success and establish a strong brand identity.

Selecting a management structure

When forming a limited liability company (LLC), you have two management structure options: member-managed or manager-managed. The choice between these two structures depends on factors such as business size, the desired level of member involvement, and the need for professional management.

Member-Managed LLC

In a member-managed LLC, all members are considered managers and participate in running the business. This structure suits smaller or family-run businesses, allowing members to actively participate in management decisions. Each member has the authority to make decisions and bind the LLC.

A member-managed LLC is ideal when:

• The business is small with limited resources and a low number of members.
• Members have sufficient management experience and skill.
• All members want to be active participants in operational decisions.

The advantages of a member-managed LLC include:

• Simplicity and flexibility, especially for small-scale operations.
• All owners have a say in running the business.

However, there are also some downsides:

• All members must work together in running the business, which can become more complex as the number of members increases.
• Depending on the operating agreement, a unanimous vote may be required before the LLC can move forward with any decision.
• Member-managed LLCs may have a harder time attracting investors who do not want to be involved in management.

Manager-Managed LLC

In a manager-managed LLC, only designated members, certain non-members, or a combination of both are given the responsibility to run the business. The other members are passive investors who are not involved in day-to-day operations. This structure is ideal for larger businesses where not all members wish to be involved in daily operations or where professional management is desired.

A manager-managed LLC is ideal when:

• The business or ownership is too large, diverse, or complex for all members to share management responsibilities.
• Some members lack management skills or do not want to be involved in operational decisions.

The advantages of a manager-managed LLC include:

• The ability to attract passive investors.
• Management is limited to a small group of management-minded people, allowing for faster and more efficient decision-making.

However, there are also some potential disadvantages:

• Some owners are excluded from management decisions.
• It can be challenging to find managers that the owners trust to run the business.
• The LLC may need a more complicated operating agreement outlining the managers' duties and responsibilities.
• The LLC may have to pay the manager a salary.

Operating Agreement

Regardless of the management structure chosen, it is critical to have an operating agreement in place. This document defines the rights, roles, and responsibilities of the members and managers, helping to mitigate any future misunderstandings. It outlines the management structure, roles, decision-making processes, and financial affairs of the LLC.

For member-managed LLCs, the operating agreement includes provisions such as member voting rights, capital contributions, buyout provisions, and other operational issues.

For manager-managed LLCs, the operating agreement should clearly spell out the choice of management structure and address the authority and responsibilities of the managers.

Understanding tax implications

Understanding the tax implications of an investment LLC is crucial before setting one up. Here is a detailed overview:

Pass-Through Taxation

An LLC is a pass-through entity for taxation purposes. This means that any profits or losses made by the LLC are passed through to its members, who then report their portion on their individual federal tax returns. This is in contrast to a traditional corporation, which pays taxes on its profits before distributing them to shareholders.

Default Tax Classification

By default, a single-member LLC is taxed as a sole proprietorship, while a multi-member LLC is taxed as a partnership. In these cases, the LLC itself does not pay federal income taxes, and the members pay taxes on the LLC's profits as if they had earned that income directly.

Alternative Tax Classifications

An LLC has the flexibility to elect an alternative tax classification, such as an S-corporation or C-corporation.

S-Corporation

An S-corp is still considered a pass-through entity, so it avoids federal corporate income tax. Additionally, S-corps do not have to pay the 15.3% self-employment tax. However, S-corps may be required to pay taxes directly to the IRS in rare situations, such as when the S-corp was previously taxed as a C-corp.

C-Corporation

A C-corp, on the other hand, is subject to "double taxation". The LLC itself pays taxes on its profits at the corporate level, and then the shareholders pay taxes again on the dividends they receive. While this structure may not be advantageous for investment LLCs, it does allow the company to retain more profits in the business, which can be beneficial for growth.

Capital Gains Taxes

Just like regular investors, LLCs are subject to capital gains taxes. If the LLC is taxed as a partnership, sole proprietorship, or S-corp, deductions and exceptions can be applied to lower the tax bill. However, if the LLC is taxed as a C-corp, it will pay taxes on the net capital gain.

No Special Tax Treatment for Investments

It is important to note that simply holding investments in an LLC does not provide any special tax treatment. The IRS does not recognize the LLC as a separate entity for tax purposes, so each member reports their share of income, losses, dividends, etc. on their taxes as if the LLC does not exist.

State Taxes

In addition to federal taxes, LLC members may also be subject to state taxes, which vary depending on the state in which the LLC is formed. Some states may have additional taxes or fees associated with forming and maintaining an LLC.

Protecting personal assets

Understand LLC's Limited Liability Protection

When you form an LLC, you create a new business entity that is legally separate from its owners. This separation provides limited liability protection. This means that, in general, if the LLC can't pay its debts, the creditors can only go after the LLC's bank account and other assets. The owners' personal assets, such as cars, homes, and bank accounts, are safe, and the owners only risk the amount they have invested in the business.

However, there are some exceptions. Owners are still liable for debts that they have personally guaranteed, unpaid payroll taxes, and any wrongdoing on their part.

Obtain LLC Insurance

If someone sues you for wrongdoing, your LLC won't protect you from personal liability. To protect yourself and your business in this case, it is important to have a good liability insurance policy.

Maintain your LLC as an Independent Entity

To avoid any chance of being held personally liable as the "alter ego" of the LLC, keep the LLC's records and finances separate from your personal finances. The LLC should have its own bank account, credit cards, contracts, invoices, purchase orders, and other important documents, which should always be signed on behalf of the LLC.

Establish LLC Credit

Personal guarantees are a major reason why small business owners become liable for company obligations. If you personally guarantee a lease or loan, you agree to make payments if the LLC cannot. To avoid this, establish credit in your LLC's name, pay your bills on time, and show a track record of revenue and profit.

Keep 'Just Enough' Money in the Company

If your LLC is sued, the money in the LLC can be used to satisfy a creditor, but your personal assets usually cannot. Therefore, it makes sense to keep as little money as possible in the company and pay the rest to the owners. However, be careful not to keep too little money in the company, as this could be seen as undercapitalizing your business to defraud business creditors.

Explore Strategies to Protect Assets from Personal Creditors

Depending on the state, there may be ways to protect your personal assets from personal lawsuits or claims. For example, you can put assets into a trust that is protected from creditors, or certain property, such as your primary residence and retirement accounts, may be automatically protected from creditors. Consult an estate planning or bankruptcy attorney to determine how to structure your assets to shield yourself from liability for business obligations.

Pooling money with others

LLCs are often used by families, groups of friends, or partners who want to pool their money for investment purposes. It is also possible for an individual to create an investment LLC.

Some typical types of investments made under an LLC include stocks, ETFs, mutual funds, bonds, CDs, fixed-income instruments, and ownership of businesses.

• Decide what you want to invest in: The first step is to determine the type of investment you want to make. This could be alternative assets such as real estate or business ventures, stocks, or other traded securities, or more unconventional investments like collectibles or art.
• Gather your group of investors: Reach out to your friends, family, and people you know, like, and trust to form the core of your investor group. It is important to find like-minded investors who align with your investment goals and strategies.
• Determine how much money each person will contribute: Consider individual income levels, total costs, and any specific limits or minimums set by the group or the deal you are investing in. Open discussion and collaboration are key to determining fair contributions for each member.
• Sign an operating agreement: Have a clear and detailed operating agreement in place that outlines everyone's responsibilities, including equity, contributions, and other key aspects that will govern the day-to-day operations of your investing business. The operating agreement should be backed up by comprehensive bylaws to provide further guidelines for everyone involved.
• Follow through with the investment plan: Once you have your group of investors and a signed operating agreement in place, it's time to execute your investment plan. Remember that investing is one of the best ways to build wealth over time, but it also carries financial risks.

Frequently asked questions