A limited liability company, or LLC, is a business structure organized in accordance with state statutes, which vary from state to state. In general, LLCs offer slightly lower start-up costs than either S or C corporations, and fewer reporting requirements.
One advantage of an LLC is that it limits the liability of the LLC members to the assets held within it. On the other hand, a sole proprietor's liability extends beyond the assets directly related to the business, such as equipment, to the owner's personal holdings, including her residence.
LLCs and Mutual Funds
A limited liability company can hold mutual funds. In fact, all common business structures -- LLCs, limited partnerships, S corporations and C corporations -- allow the organization to conduct business with the same restrictions and privileges that pertain to individual ownership. Where mutual funds are concerned, another pertinent issue is whether there is anything gained by holding them within an LLC rather than owning them personally. In certain instances, there are some advantages of an LLC over a sole proprietorship or partnership that may exceed the cost of setting one up and maintaining it.
One problem for investment clubs in which nonprofessionals make investment decisions is that one or more members can hold others liable if an investment goes sour. If the club is organized as a partnership, the liability can extend beyond members' investments to their other assets, including residences and businesses. One popular solution is the formation of an investment club as an LLC. The liability of the members is then limited to the mutual funds or other equities held by the club. This liability advantage is generally applicable. A leadership consultant who sets up as a sole proprietorship has unlimited liability for client claims against her. If she sets up her consultancy as an LLC, her liability is limited to the business assets of the consultancy.
Another advantage of the LLC structure is that it may reduce self-employment taxes if you elect to have the LLC taxed as an S corporation, which the IRS allows. If you and another family member have organized your family business as an LLC, you may take out a reasonable portion of the profits as a distribution rather than as salary. Distributions aren't subject to self-employment taxes. There is no greater advantage in this than in organizing your business as a S corporation to begin with, but it gives you the tax advantage of an S corporation distribution of some income without the reporting and other expenses that come with an S corporation structure. Moreover, it does not in any way restrict your right to invest in mutual funds or other equities.
Tax on Investment Income
Note that with respect to profits on mutual fund holdings, the LLC with an election to be taxed as an S corporation provides no advantages over a sole proprietorship because profits on investment income aren't subject to self-employment taxes. Moreover, the IRS does not allow profits from investments in any of the usual business structures to be distributed as dividends; they are ordinary income.
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