How To Create an LLC for Crypto Investing
When it comes to protecting yourself as an investor, creating an LLC for crypto investing could be one of the most important things that you do.
This article is a summary of a video that was done by Jeremy Hogan. Jeremy is an XRP community member and a lawyer. Please go follow him on Twitter @attorneyjeremy1 or check out his YouTube channel Legal Briefs. Don’t forget to check out the original video where Jeremy details how to protect your crypto investments with an LLC.
Disclaimer: Nothing in this article should be taken as legal or tax advice. I AM NOT a lawyer or an accountant and I do not pretend to play one on the internet. You should hire a lawyer or accountant if you’re looking for professional advice. It will be money well spent knowing that you had things done professionally and correctly.
Why open an LLC for Crypto investing?
The main reason to set up an LLC will be to protect your money from any potential lawsuits or collectors.
As a lawyer by profession, Jeremy has seen people lose everything. It’s essential to have a plan set in place to protect yourself from the automatic target that you’ll have on your back if you start making serious money from your investments.
It’s unfortunate, but the reality is that success and wealth will make you a possible target for acquaintances, friends, family members, business partners, and scammers. The smart thing to do, even if you don’t believe that it can happen to you, is to protect yourself.
Why an LLC?
It provides asset protection.
An example Jeremy uses in the video is from one of his clients, a dad, who let his son borrow his BMW when his son was home from college. The son had some drinks, drove the BMW, and ended up hitting a woman. The damages exceeded the client’s insurance and both the father and the son became liable and were both sued by the woman.
The moral of the story is that you can do nothing wrong and still be sued for large amounts of money. By creating an LLC for your crypto, you can protect your digital assets from potential lawsuits because, under corporate law, the company is a separate entity and only responsible for its own actions.
So, if you are proactive and get your LLC set up correctly, you should then transfer your assets to your LLC, where it will be safe from plaintiffs and other creditors.
You may be asking “Why an LLC?” Why not a Sole Proprietorship or S-Corp?
Jeremy explains that LLCs have the easiest “pass-through” taxation. This means that the LLC itself is not taxed, meaning there is no double taxation issues as would be the case with a regular corporation.
Additionally, an LLC can actually provide you with some nice tax advantages, which means more money you get to keep.
How do you set up an LLC?
Setting up an LLC isn’t overly complicated and it’s something that you could do yourself if you wanted to.
In my opinion, as mentioned above, I think it’s best to get it done professionally and rest assured it was done the right way.
Some great options include LegalZoom or mycorporation.com. Additionally, you could find a local lawyer and pay them to set it up for you.
If you plan on setting up an LLC yourself, these are the steps:
Step 1:
Choose a name for your LLC.
You’re required to pick a name that does not already exist and it must end in “LLC.”
Step 2:
You need to appoint a Registered Agent.
The registered agent needs to be appointed in case you (the company) get sued. In most cases, this will just be you at your address.
Step 3:
File Articles of Organization.
The Articles of Organization are pretty simple and it’s just something that says who the owners of the company are and what the main business is. In our case, it would just be “investment business.”
Step 4:
Prepare the Operating Agreement.
If you are the only owner of the company, which is most likely the case, you may not even have to do this. If you do decide to have it done, a lawyer will need to do it for you.
Step 5:
Obtain an EIN.
To get your EIN, you’ll have to reach out to the IRS and the best way to do this is by calling or emailing them. Just give them the name of the company and in turn, they will give you a federal tax ID number, usually by the next day.
Congrats, you’ve created your LLC for crypto investing!
Step 6:
For the last step, you are going to want to open up a bank account under the company name, using the federal tax id number.
All your business expenses can now be easily tracked with your company account.
Important Things To Be Aware Of
Jeremy mentions that in law school, students spend about a month or two in corporations class learning about what they call “piercing the corporate veil.”
In short, this just means the study of suing individuals, despite the fact that they are protected by a corporate structure. The “piercing of the corporate veil” means to pierce the corporation to get at the individuals working inside it.
This means that in order to have the protection that your LLC will offer you, it must be treated as a separate entity.
Here are some things you should be careful of:
- You can’t use money in the LLC’s bank account for personal things. An example Jeremy mentions in the video would be linking your Amazon account.
- You can’t co-mingle funds, meaning that you should not be moving money around from your personal and business accounts.
- When you decide to remove any money for personal use, it needs to be put on the ledger and you must keep track of it as a “business disbursement to the owner.”
- You must keep track of ALL the money that is taken in and out of your business account.
Next, this brings us to crypto trading…
Now that you are doing things properly, your main trading accounts should be in your corporate name.
For example, Coinbase allows you to have a business account.
In this case, Coinbase would want to confirm that your business actually exists and that the information you’ve provided them is correct, along with some additional information. You may need to have some patience while setting this up, as Jeremy mentioned it was somewhat of a headache and it took him about 2 weeks before he heard back.
Lastly, you’re going to want to fund your corporate account.
Sometimes if you’re already in an exchange, it can be as easy as just transferring funds from your personal account to your corporate account and linking your corporate account. In this case, it’s Coinbase, in which you would link the corporate bank account.
Jeremy says the best thing to do, if you’re looking for simplicity, is to write an old-fashioned check from your personal account to your corporate account, which is easy to track and it clearly shows that you are funding the business.
Where should you incorporate your LLC?
You actually have the option of incorporating your LLC in a state other than where you actually live.
But not all states are created equal and some states list your company information as public information on the internet while others offer privacy.
In most states, if someone was looking to sue you or get money, a simple search of your name or company name could pull up a list of all the companies you may be involved with, listed as public information.
Let’s say, for example, here in Florida, someone trips and falls on my property and the lawyer is looking at the case, trying to figure out whether he will sue me.
A lawyer may see this and decide that you’re worth pursuing and may have some money perhaps because you have a couple of businesses listed.
If you are smart, you should be looking for privacy, and if you’re looking for privacy, that narrows our list down to two states:
Delaware and New Mexico are the two best choices to create your LLC for crypto investing.
Additionally, there may be other personal reasons you may not want to expose your information to the public, especially with the state of the world today.
It doesn’t mean you are being sneaky or that you’re a bad person, it just means that you’re taking the appropriate steps to protect yourself and take advantage of your privacy rights.
New Mexico is the cheapest and easiest and allows you to do all your incorporating documents online, usually, with a one-day turnaround.
Big thanks to Delaware, New Mexico, and Jeremy Hogan!
Here are some helpful links if you’re looking to set up your LLC: