You've begun investing and you're very excited about it. You create a fantastic portfolio, you see your stocks rising, and everything seems to be on the up and up. Great! Wonderful! It couldn't be better.
While you've been investigating a variety of protections (insurance, incorporating, etc) you come across the humble LLC. It's a perfect stepping stone from private investor toward business investing and it has few downfalls; if any. Let's take a look at several reasons why you may want to create an LLC to protect your investments and yourself. And perhaps, those partners you may also involve in your venture!
LLC for Investments
Your LLC is going to be a barrier between your finances and the rest of the world. This counts even more so when you start to get others involved (if you do so). Essentially, the LLC works as an entity of and in itself. While you can pay you dividends to yourself and those involved in the LLC at a pre-agreed upon rate, the LLC takes the hit if your portfolio begins to tank.
And take a look at the stock market. Things happen. Sometimes even "sure bet" stocks take a tumble. That's where your LLC comes in. Your LLC is all about protecting your person and your investments by allowing them to operate in separate categories, so far as everyone else involved considers them. But why is this important? Why does it matter who considers what part of an LLC's finances?
Why to Invest Through an LLC
Let's pretend that you've invested $3,000.00 in Apple. That's a good chunk of money for most people. You create an LLC to manage it for taxation reasons. Good idea.
Your friend, Bob, decides that he also wants to invest in Apple. He becomes a member of your LLC for a small fee and agrees to give you 10% of his earnings. You have a substantial risk involved since your LLC is now covering your stock and his stock. However, that LLC protects both of you.
This is why so many people are moving into LLCs for their investments. The protection is worth the fees associated with creating your LLC and it makes it much easier for a group or a family to condense their stocks and profit together. In fact, the Walton family, one of the richest families in the United States, has an LLC for their investment portfolio.
There are several reasons to bother with an LLC, though we've covered a good many of them already. One of the most important ones is that you can grow with each other rather than against each other. If everyone wants to invest in, again for instance, Apple, then everyone can pool their money and place it in the LLC's portfolio.
Yes, you're managing other people's money but it's all protected under the LLC. You aren't technically responsible for any of it, and all of this should be made crystal clear to your investors upon their initial investment. You can take a percentage off the top while your funds assist them in creating a more robust portfolio as well. It's a great way to create an investing team without everyone having to carry a huge amount of personal protection or changing the way that they invest.
The one drawback is that other members can keep you from selling your stocks if they don't want the LLC's stocks to decrease. Let's say that Bob and Susan are both part of your LLC. You see stocks falling and you want to sell off 30% of the LLC's stocks. They vote against it and you're stuck, since everything is put to a vote within the LLC.
However, if the people you are investing with are presented with the cold, hard facts, you should be in fine shape anyway. Which brings us to our next point.
Considering the Future
When you create an LLC, it's usually to keep your personal finances protected from your business finances. An LLC can go bankrupt without the owners of it doing so as well. It's why we recommend them so often: they're the first line of defense for your personal bank account.
However, they also make it easy for people to take a step back from business. If you, Bob, and Susan are all tired of playing the stock market and want to off-load your shares at once, it only takes a single press of a button to do so. Easy as pie.