Limited liability companies are small business legal structures that let the owners separate their personal finances from the legal and financial liabilities of the company. LLCs may own mutual funds, stocks, bonds, real estate and other investment assets, but there is little advantage to be gained for most investments. Certain types of individual retirement accounts (IRAs) and investment clubs use LLCs to manage investment portfolios that include mutual funds.
Basics of the LLC
LLCs offer small business owners the legal protections of a corporation while allowing them to keep the tax simplicity of an unincorporated business. Owners of an LLC each have membership shares, which give them the rights agreed to when the LLC was formed, including the percentages of profits. LLC member profits are treated like ordinary income, and the member, not the LLC, pays taxes on the business income. LLCs don't offer any specific tax or legal advantages for holding mutual funds, stocks or bonds. In fact, LLCs require start-up costs and annual fees that could eat into investment profits.
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LLC Investment Profits
Profits from investments held by LLCs are taxed like investments held by individuals, including rules on capital gains that require that an investment be held for at least a year in order to qualify for the lower tax treatment. Mutual funds can pay dividends to their shareholders from the profits made through selling assets in the fund's portfolio. In these cases, capital gains tax is determined by how long the mutual fund owned the asset, and not how long the investor or LCC owned shares of the mutual fund. If an LLC owns mutual funds that pay dividends or investment earnings, any LLC members that receive investment income from the fund will pay the same tax rates that would apply to individual investor shareholders.
Investment clubs often form as LLCs, according to the Nolo website. These clubs serve to pool together the resources of individual investors, who will often meet to discuss and analyze their investment choices. Through their dues, members of the investment club would be owners of the LLC. The LLC maintains an investment portfolio that is voted on by the members and can include almost any investment, including mutual funds. Profits are either redistributed back into the portfolio or distributed back to members.
Self-Directed IRA LLC
Investors that want to personally control their retirement account can set up a self-directed IRA through an LLC structure. While some self-directed IRAs have custodians who manage the portfolio, a self-directed LLC IRA gives the investor more direct control of the IRA and limits custodial fees. However, setting up a self-directed IRA LLC can be complicated and may result in transactions that are prohibited by the IRS.
LLCs for Real Estate
One of the most common investments held in an LLC is rental real estate, according to the Chicago Tribune. Because LLCs offer liability protection, investors will hold rental properties in an LLC to protect their personal financial assets from any legal liabilities on the property. For example, if a real estate LLC owned an apartment building, residents who sue the building owners couldn't go after the house or bank account of any LLC members. Conversely, the assets of building owners who aren't incorporated could be at risk in a lawsuit. LLCs must receive proper legal maintenance, or the court could "pierce the veil" of the corporation and expose any LLCs members' assets to legal liability.