Single-member LLCs for investing: What you need to know

If you’re looking for a way to invest your money and keep it separate from your finances, you may consider setting up a single-member LLC. 

This type of Limited Liability Company (LLC) is perfect for investing, and it has several advantages over other types of businesses. In this article, we will discuss the benefits of using a single-member LLC for investing and provide some tips on how to get started.

What is a single-member LLC?

A single-member LLC means that one individual owns it. This person is thus responsible for managing the company, most importantly, making sure that the obligatory taxes are being paid.

The difference between a single-member and multi-member LLC is the number of people owning the company.

A single-member LLC has become popular amongst freelancers and investors due to tax benefits and personal asset protection.

Setting up an LLC allows you to invest in stocks, bonds, mutual funds, real estate, and other opportunities.

What are the benefits of an LLC for investing?

  1. The main benefit of forming an LLC is limited liability protection, meaning separating business and personal assets.
  2. LLC members have financial liability up to the number of capital contributions provided by the member to the LLC, whilst their personal assets (real estate, personal bank account, etc) are protected.
  3. As an established business, you’ll be able to save money by writing off different costs and having greater flexibility with federal taxes.
  4. A Limited Liability Company will enable you to add new members, as well as pass on ownership to others whenever necessary.

Investment LLCs are generally created as an investment vehicle for families, partners, or groups of friends, who are looking for ways to pool money for investment purposes.

What should you know before registering an investment LLC?

A single-member LLC can be set up by yourself, or to make matters easier, you can use a Registered Agent service, who’ll do the tedious tasks like filing paperwork with the state for you – this, of course, will come with some legal fees.

It’s important to note that limited compliance laws vary by state. Most of them allow a single ownership structure, and there is no maximum number of members for an LLC.

Registered Agent

As a single-member LLC, you can easily be your Registered Agent (also known as a resident agent or statutory agent), as long as you meet the following requirements:

  • 18 years or older
  • have a physical address in the state where the LLC is formed
  • is available (in person) during business hours

An alternative is to hire a professional Registered Agent service and appoint a trusted friend or officer to the position.

LLC operating agreement

A single-member LLC operating agreements are legal documents that sets forth the rules and regulations of the company. This helps to eliminate ambiguity about the business strategy and investments.

A single-member operating agreement should include the following:

  • LLC details: name, location, purpose
  • Registered Agent: the person you’ve chosen responsible for the company
  • LLC membership: as a single-member LLC, you’ll only list one individual
  • Financial instructions: how the profits, losses, and bonuses are handled
  • Term of LLC: either a set amount of time or “perpetual.”
  • Accounting details: who’s responsible for accounting and which method will be used, including tax implications
  • Legal: who is responsible in the event of a lawsuit
  • Dissolution: what needs to be done when the business stops its operation

State Default Laws

If your single-member LLC does not file an operating agreement, you’ll be subject to the state’s default laws in which your business resides. Default laws outline the state’s rules on operating in certain legal situations.

Although the laws were designed to protect business owners, they can, at times, hurt them instead.

An operating agreement is a crucial part of the LLC formation to help make sure that the owner’s wishes are honored when certain events occur.

LLC is a pass-through entity for tax benefits

Pass-through businesses include Limited Liability Companies, Sole Proprietorships, Partnerships, and S-corporations.

The share of business activity represented by pass-through entities has been rising for several decades.

Pass-through taxation means any profits or losses the company earns pass through the business and on to members. So each member is held personally liable for reporting their portion of capital gains or losses on their own yearly federal tax return.

Since there are multiple possibilities for managing taxes as an investing LLC. How you pay taxes and do your tax return should be discussed with a financial advisor or tax professional.

Simplified Employee Pension (SEP) IRA

A Simplified Employee Pension (SEP) plan provides business owners with a simplified method to contribute toward the employees’ retirement accounts and their retirement savings.

The contributions will be made to an Individual Retirement Account or Annuity (IRA) set up for each plan participant (a SEP-IRA).

An LEI is needed when investing as a single-member LLC

A Legal Entity Identifier (LEI) is a 20-character, alpha-numerical code based on ISO 17442 that links to reference information identifying legal entities participating in financial transactions.

It is a universal identifier that answers the entity’s ownership structure, ‘who is who’ and ‘who owns whom.’

When opening a bank account for your LLC, you must also register this unique identifier.

A company’s LEI will be public and contain data about the company’s registered and trading names; company type; registered address; registration number; parent company information; child company information.

After forming the G20 concept, the Financial Stability Board (FSB) appointed a new not-for-profit organization, The Global Legal Entity Identifier Foundation (GLEIF), to watch over it.

The foundation doesn’t issue the codes but leaves them to a network of public and private companies acting as Local Operating Units (LOUs).

An LEI code is needed for an investment LLC. To obtain an LEI code, you’ll want to reach an LEI Registration Agent.