The limited liability structure provides small business owners with the same personal liability protection that corporate shareholders enjoy, but without the double taxation that impacts C corporations. State laws don’t preclude an LLC from buying and holding stocks or other investments in the business’ name. However, an LLC operating agreement may prohibit the business from doing so.
When an LLC Can Buy Stock
An appealing characteristic of an LLC is that members -- the LLC owners – can use the entity for any legal purpose, which includes investing company money in stocks. Members also have the authority to draft operating agreements as broadly or narrowly as they desire. Operating agreements control all aspects of the business, and may include clauses that limit how much stock the LLC can buy, the type of investments that are permissible and how stock gains and losses are to be allocated among the members. The agreement -- which is binding on all members -- may even prohibit the purchase of any corporate stock.
Buying Stock in S Corporations
Certain small businesses make elections to be taxed as S corporations in order to avoid the double taxation that results by default with corporate entities. Although an LLC member can buy stock in an S corporation if fewer than 100 shareholders exist, an LLC cannot. This is because the rules governing S corporations don’t allow LLCs, corporations and other business entities to own stock in the company. If an LLC or other prohibited shareholder does buy stock, the company can lose its S corporation status.
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