Can an Individual Invest in an LLC?
- An LLC operates as a distinct legal entity from an individual who may invest in the business. This means an individual member of an LLC has limited liability protection from the company’s debts and obligations. A business creditor can't pursue an LLC member’s home, automobile, bank accounts and other personal assets as compensation for company debts. If the business gets sued, the judgment doesn't carry over to a member’s personal assets if the company’s assets are insufficient. An individual member’s liability for company debts and obligations doesn't extend beyond the amount he has invested in the business.
- An LLC may elect taxation as a corporation, partnership or a sole proprietorship. When an LLC elects taxation as a corporation, the company must pay taxes on company profits as the company’s corporate tax rate. This means the LLC must file a corporate tax return, just like a regular corporation. In this scenario, individual members of the business must pay taxes on distributions received from the business according to their personal income tax rate. When an LLC elects taxation as a partnership or a sole proprietorship, individual members of the business are allowed to pass their portion of company profits and losses to their personal income tax return. In this scenario, the company doesn't file a tax return or pay taxes on company profits as a business entity.
- Individual members of an LLC have a right to participate in the management of the business, if the members of the company are responsible for handling the company’s day-to-day activities. In a situation where the company hires managers to conduct the company’s daily affairs, an individual that invests in the business may or may not have the right to vote on important issues, depending on the terms outlined in the company’s operating agreement. The operating agreement indicates the rules and regulations for running the LLC, explains the rights and powers of the company’s members and managers, and describes each member’s contribution to the business. An individual member has the right to inspect the company’s financial records at any point in time.
- An individual member of an LLC may receive more or less than her allocated share of the company’s profits and losses. For example, an individual member who invests in an LLC may own a 20 percent interest in the business. However, the company’s other members may agree to pay him 25 percent of the company’s profits and losses. An individual member of an LLC may withdraw from the business according to the terms indicated in the operating agreement. The operating agreement must contain provisions for continuing the LLC in the event of a member’s departure.