Can you invest other people’s money in an LLC?

A Limited Liability Company (LLC) is a business structure that combines the liability protection of a corporation with the operational flexibility of a sole proprietorship or partnership. It allows business owners, known as members, to separate their personal assets from the company’s liabilities, meaning they are generally not personally responsible for the company’s debts or legal obligations. This protection ensures that if the business faces lawsuits or financial difficulties, the members’ personal assets such as homes, cars, and savings are not at risk.

Unlike corporations, which require formal structures with boards of directors and shareholder meetings, an LLC offers flexibility in management. Owners can either manage the business themselves or appoint managers to handle operations. This makes the LLC an attractive option for small businesses, startups, and independent entrepreneurs who want legal protection without the complexity of corporate governance. The tax structure of an LLC is also highly flexible. By default, a single-member LLC is treated as a disregarded entity, meaning it is taxed similarly to a sole proprietorship, while multi-member LLCs are taxed as partnerships. However, LLCs also have the option to be taxed as either an S-corporation or a C-corporation, allowing owners to choose the structure that best suits their financial needs.

The history of the LLC as a business entity can be traced back to Europe, where the concept of limited liability businesses first appeared. Germany introduced the Gesellschaft mit beschränkter Haftung (GmbH) in 1892, which became a model for similar structures in other countries. The Panamanian limitada followed in the early 20th century, offering similar liability protections for businesses. In the United States, the LLC concept was first recognized in Wyoming in 1977, when state lawmakers introduced legislation that allowed businesses to operate under a hybrid structure combining liability protection with pass-through taxation. This innovation gained traction in the 1980s and 1990s as other states adopted similar laws, and by the end of the 1990s, LLCs had become one of the most popular business structures in the country.

The appeal of the LLC lies in its ability to provide limited liability while avoiding the double taxation that traditional corporations face. In a C-corporation, profits are taxed at the corporate level and again when distributed to shareholders as dividends. In contrast, an LLC allows profits to pass through to the owners’ personal tax returns, meaning they only pay taxes once on their earnings. This structure makes LLCs especially attractive for small business owners who want to reduce their tax burden while still enjoying liability protection.

The LLC differs from other business entities in several ways. A sole proprietorship offers simplicity and direct control but lacks liability protection, meaning the owner is personally responsible for all debts and legal obligations. A general partnership operates similarly, with two or more people sharing management responsibilities, but without the liability protection that an LLC provides. A corporation, while offering liability protection, requires more formal governance and regulatory compliance, including annual meetings, board elections, and extensive record-keeping. The S-corporation, another popular option, avoids double taxation like an LLC but comes with stricter ownership and operational restrictions, such as limits on the number of shareholders and their residency status.

One of the primary reasons business owners choose an LLC is the balance between liability protection, taxation flexibility, and ease of operation. Many small businesses, real estate investors, freelancers, and startups form LLCs to protect their personal assets while maintaining a simple business structure. E-commerce businesses, independent contractors, and professional service providers also favor LLCs because they can customize how they manage their business while still benefiting from pass-through taxation. Additionally, real estate investors often use LLCs to separate rental properties from their personal finances, reducing risk in case of lawsuits or tenant disputes.

Despite these benefits, LLCs have some drawbacks. In some states, LLCs are subject to higher filing fees and annual franchise taxes compared to sole proprietorships or general partnerships. Unlike corporations, LLCs generally cannot issue stock, making it harder to attract investors who prefer the stock-based equity system of traditional corporations. Additionally, in certain legal situations, courts can override the liability protection of an LLC if the business fails to maintain clear separation between personal and business finances or engages in fraudulent activities. This legal concept, known as piercing the corporate veil, means that owners could still be held personally liable if they misuse the LLC structure.

Businesses that prioritize flexibility and liability protection often find that forming an LLC is the best choice. The process of setting up an LLC is relatively straightforward, involving selecting a unique business name, filing Articles of Organization with the state, and creating an Operating Agreement that outlines how the business will be managed. Many LLCs also choose to obtain an Employer Identification Number (EIN) from the IRS to handle tax obligations and payroll processing. Once established, an LLC can operate with fewer regulatory burdens than a corporation while still benefiting from legal protections that separate business and personal liabilities.

As business environments evolve, LLCs continue to be a preferred structure for entrepreneurs who want both security and flexibility. Advances in digital business operations, remote work, and online commerce have made the LLC an even more popular choice, as it accommodates a wide range of industries and business models. Many modern startups begin as LLCs before converting to corporations when seeking venture capital investment. Others remain as LLCs indefinitely, benefiting from their straightforward structure while scaling operations.

The LLC has become a fundamental business entity that bridges the gap between informal sole proprietorships and highly regulated corporations. It provides a legal foundation for businesses of all sizes, offering owners the ability to manage their company with minimal restrictions while protecting their personal assets from potential risks. By allowing flexibility in taxation, operational control, and ownership structure, the LLC remains a widely used business model for entrepreneurs, small business owners, and independent professionals across a variety of industries.

An LLC can invest other people’s money, but the process depends on how the LLC is structured and whether it complies with financial regulations. If an LLC plans to pool money from investors, it must ensure that its operating agreement specifies how investments will be handled, how returns will be distributed, and what level of control investors will have. An LLC can be set up as an investment vehicle, such as a private equity or real estate investment firm, but it must comply with securities laws to avoid legal issues.

If an LLC raises money from outside investors, it may be considered a security, requiring compliance with regulations from the U.S. Securities and Exchange Commission (SEC) or other regulatory bodies. Securities laws exist to protect investors from fraud, so LLCs accepting outside funds may need to register their offerings or qualify for exemptions under rules such as Regulation D, which allows private placements without full SEC registration. Violating these regulations can lead to serious legal consequences, including fines and restrictions on raising future capital.

Investment LLCs often operate as private funds, where members contribute capital in exchange for an ownership percentage or a share of profits. The operating agreement defines how profits, losses, and decision-making authority are allocated. In cases where the LLC is structured as a fund manager or investment firm, it may be required to register as an investment advisor with the SEC or state regulatory agencies, depending on the assets under management and the number of investors involved.

A key factor in investing other people’s money through an LLC is whether the LLC is managing funds on behalf of passive investors or actively engaging in investment activities. If investors contribute money without participating in management, the LLC may be treated as a private investment fund, which comes with additional regulatory requirements. In contrast, if all investors are actively involved in decision-making, the LLC may avoid certain securities law restrictions.

In industries such as real estate, venture capital, and private equity, LLCs are commonly used as investment vehicles. Many real estate investors create LLC syndications, where multiple investors pool money to purchase and manage properties. Similarly, venture capital firms sometimes use LLC structures to hold startup investments while offering tax advantages to investors. In these cases, having a clear operating agreement and legal compliance measures in place is crucial.

While an LLC can legally invest other people’s money, it must do so within the framework of financial regulations, securities laws, and contractual agreements with investors. Seeking legal and financial guidance is essential to ensure that the LLC operates within the law and protects both the business and its investors from potential liabilities.