Investing Bitcoin in an LLC
Table of Contents
- An LLC combines the legal protections of a corporation with the flexibility of a partnership or sole proprietorship.
- Many governments, business organizations, and other entities believe the risk-adjusted return on a bitcoin investment has asymmetrical upside and stores value better than the dollar over time.
- Retail investors may wish to invest bitcoin in an LLC to protect it from being seized by outside creditors.
More governments, companies, and financial institutions are looking to acquire bitcoin, and retail investors are looking for long-term solutions to protect their bitcoin investment.
Generally, Limited Liability Companies (LLCs) offer a lightweight and flexible structure which can be used to protect assets and members from certain external liabilities. LLCs combine the liability shield of corporations with the tax benefits of a partnership or sole proprietorship.
Who Can Invest Bitcoin in an LLC?
Governments, companies, funds, small businesses, and individuals over the age of 18 can invest bitcoin in an LLC. Investing bitcoin in an LLC presents relatively low barriers to entry compared to forming other types of business organizations to store an asset.
Investing bitcoin in an LLC requires strategic planning and thorough research, and the advantages to investing bitcoin in an LLC vary depending on the type of entity or number of individuals creating the LLC.
To ensure that bitcoin held in an LLC passes to the estate properly, members can draft an operating agreement that includes an express provision detailing exactly what will happen to the bitcoin after a member of the LLC passes away.
Many governments, business organizations, and other entities believe the risk-adjusted return on a bitcoin investment has asymmetrical upside and stores value better than the dollar over time. Insurance companies, wealth managers, and pension funds have also shown interest in bitcoin investments, departing from short-term fixed income assets and real estate.
For example, MicroStrategy, Tesla, and Square have bought bitcoin and held it. Those companies use bitcoin to diversify their treasury, hedge inflation as the money supply and price of goods increase, and to facilitate payments.
Inflation will cause short term debt instrument yields to decline and become less attractive investments. As a result, inflationary hedges, become more attractive to hold.
Companies may also choose to invest in bitcoin to complement existing payment rails. A payment rail is the infrastructure that facilitates digital transactions, generally measured by security, volume, and settlement time.
Bitcoin operates on a real-time blockchain payment rail, meaning that transaction blocks are processed every 10 minutes. The blockchain is a superior payment rail, especially for international trade, because it can reduce transaction fees and facilitate quicker settlement times than wire transfers.
Retail investors may also wish to invest bitcoin under the umbrella of an LLC. The process of sheltering assets in an LLC is commonly used in the real estate industry, where a landlord may form a unique LLC for each property they own, thus limiting liability to a single property if a claim were to arise.
In this sense, the LLC behaves as a sealed container, which separates the asset from its owner, and forms a legal shield between LLC members and certain external liabilities.
Retail investors may also wish to invest their bitcoin in a retirement account. Many investors believe that holding bitcoin in a retirement account will be advantageous because it diversifies that account and bitcoin may appreciate over time. In that scenario, an individual would send money to the retirement account, which would invest the cash into the LLC to purchase bitcoin under the protections of the LLC.
➤ Learn more about investing bitcoin in a retirement account
The Benefits of Investing Bitcoin in an LLC
Investing bitcoin in an LLC is a valuable and flexible investment method, in which the members and their assets gain an additional layer of protection against lawsuits, creditors, and liabilities.
Bitcoin invested in an LLC is less likely to be locked in probate upon the owner’s death, because assets invested in the LLC will default to the owner’s estate.
Moreover, members of an LLC are free to pick from several taxation options, which offer more flexibility in planning the structure of an LLC.
LLCs operate as a segregated legal container in which assets may be stored. Bitcoin invested in an LLC is harder for outside creditors to seize or liquidate in the event of a lawsuit or unpaid debts.
Adaptable Taxation Rules
LLC members have some ability to choose which tax structure they implement. However, single member LLCs typically do not get to choose their tax structure because the IRS will view a single member LLC as a sole proprietorship for federal income tax purposes.
The default tax structure is pass-through, which means that each member is taxed on the profits and losses of the LLC as if it was income. Under that structure, the LLC’s tax rate is based on the member’s total income and tax bracket.
Members can also elect to be taxed as S-corps or a C-corps, which present unique complexities such as employment tax and the requirement for each member to pay themselves a “reasonable” salary.
➤ Learn more about Bitcoin tax accounting and implications.
Bitcoin Mining Tax Deductions
LLCs offer tax benefits for bitcoin mining activities as well. For example, a Bitcoin mining LLC may wish to deduct the costs of equipment and electricity as business expenses, which can be used to offset capital gains accrued throughout the year.
➤ Learn more about Bitcoin mining taxes and regulation.
How Do I Form an LLC?
Generally, investing bitcoin in an LLC can be accomplished in three steps: structuring the LLC in an appropriate state, transferring bitcoin to the LLC, and documenting investments for the IRS and personal tax accounting.
Filing Articles of Incorporation
To form an LLC, first name the LLC and determine the state of in incorporation. Some states offer additional layers of privacy to founding members. Then, file the articles of incorporation within that state and appoint a registered agent.
Drafting an Operating Agreement
An operating agreement is needed to articulate the essential rules by which the LLC will operate. The operating agreement details the management, compensation, and the estate structure of the LLC. Even for single member LLCs, an operating agreement is necessary, because it will determine what happens to the LLC’s assets when the founding member passes away.
Obtaining an EIN and Opening a Bank Account
The government also requires some LLCs to obtain an Employee Identification Number (EIN) for taxation purposes. The final step is to open a bank account in the corporation’s name, signup for an institutional custody service or purchase a self-custodial wallet under the LLC’s name, and allocate bitcoin to the LLC.
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