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Do I Need an LLC to Angel Invest?

TL;DR US-based angel investors may explore setting up an LLC to house their angel investments. The main benefits are organizing investments across multiple people, preserving privacy, building an investing brand, managing business-related expenses, and maintaining flexibility to transfer ownership. Generally, investing through an LLC rather than as an individual offers no tax advantages.


What is an LLC?

So, your friend is starting a new company, and you’d like to cut an angel check. You’ve heard about LLCs, but you’re not sure what they are or if you need to form one to make the investment. 

Simply put, an LLC (limited liability company) is a legal entity that’s created to run a business or to hold assets. An LLC can be owned by one person (single-member LLC) or by two or more people (multi-member LLC)

Why would I form an LLC?

The number one reason for an investor to form an LLC is for asset protection. By forming an LLC, you create a protective wall between your business investments and your personal assets. LLCs are very popular because they provide the same limited liability as a standard corporation (an “inc”), but allow the organizers to decide how it will be taxed, including being entirely disregarded if owned by just one person. 

  • Personal asset protection. An LLC provides its owner(s) with limited liability. This means that as long as you properly maintain the LLC, you are generally not personally liable for any debts incurred by your LLC business or most business-related lawsuits. Because you're not personally liable, creditors or people who file lawsuits against your LLC can't collect against your personal assets like your personal bank accounts, personal car, or home. They are limited to collecting from your LLC's assets.
  • Taxation Benefits. By default, LLCs provide their owners with pass-through taxation. That means the profits (or losses) the business incurs pass through the business to the owner's personal tax return. Alternatively, an LLC can elect to be taxed as a C corp or potentially an S corp. If the LLC is organized with a single member and elects pass-through taxation, it will be disregarded entirely for tax purposes, as if it doesn’t exist to the IRS (you would file a “Schedule C” with your individual tax return instead). Such profits for pass-through or disregarded entities are taxed at the owner's personal tax rates (as opposed to being first taxed at the corporate level with a C corp before dividends are distributed and taxed at the individual level). However, if you operate your LLC as a legitimate business, regardless of its tax election, you can deduct meals, flights, and other business-related expenses through the LLC. If you anticipate a lot of travel or other related expenses, this could be a significant tax benefit. Also, if you live in a high-tax state like California or New York, those states now allow individuals a way around the $10K state and local tax deduction limit by paying those taxes through your pass-through entity. (We’ll cover this in more detail in another article.)
  • Flexibility. LLCs provide enormous flexibility when it comes to ownership, management, and taxation. There are no minimum or maximum limits on the number of owners that an LLC can have. Many (if not most) LLCs have only one member, but an LLC can have hundreds of members. LLC ownership units can be transferred to another entity, such as a company or trust. LLCs also allow you to sell or transfer carry without having to ask the company/founder. This is an important advantage since it’s often uncomfortable to admit you no longer believe in a company or that you need liquidity.

What are the disadvantages of an LLC?

  • Cost: It costs some money to file and establish an LLC, but it doesn’t have to be expensive for basic investment purposes. The most traditional place to organize an LLC is Delaware, but other popular places include Wyoming, Nevada, or even off-shore. Then, once the LLC is formed, you will have to pay taxes and fees, which vary from state to state. Note that LLCs will be taxed in the state of organization, as well as the state it is actively conducting business in. Please refer to a reliable resource regarding the anticipated ongoing costs to maintain your LLC.
  • Administrative Complexity: If you plan on using an LLC to deduct business-related expenses, keep in mind that it may take a significant amount of time to track expenses and deal with the administrative tasks unless you hire someone to do this (or you come up with a creative way to automate these tasks).

Should I form an LLC to angel invest?

Some angel investors choose to invest through LLCs rather than as individuals. Generally, passively investing through an LLC rather than as an individual offers no tax advantages.* People might want to form an LLC to angel invest in order to protect themselves from liability, but these benefits may be limited since it’s extremely rare for companies to sue passive shareholders—especially smaller ones.

There are a few specific instances where angel investing through an LLC rather than as an individual would be beneficial:

  1. You’re investing as a group. If you plan on co-investing with your friends or an angel group, forming an LLC can be a simple way to keep track of ownership units and stay organized instead of having multiple individuals on the cap table. If you’re investing through a syndicate on AngelList (or similar platforms), it’s very likely you’ll be investing through an investment-specific LLC that the platform will help set up. Additionally, investing as a group through an LLC may help you meet certain investment minimums.
  1. You want to preserve your privacy OR build a brand. LLCs offer the option to make investments under a different name. You might want to avoid being named individually on a cap table or you might want to start building a firm brand. (For instance, instead of investing as Joe Shmoe, you can invest under “Galaxy Investments” and generate brand awareness for your firm.) An LLC offers both these benefits.

How does this impact QSBS?

You may be concerned that investing as an LLC rather than as an individual may disqualify you for the QSBS benefit—a tax benefit where individuals don’t have to pay federal income tax on the first $10M they make, granted they invested before the company reached a $50M valuation. Not to worry. You would qualify for the QSBS benefit whether you invested as an individual or an LLC so long as the LLC elected pass-through taxation or is disregarded.

What if I'm a foreign investor?

Foreign investors may wonder if angel investing out of an LLC may be beneficial for tax reasons. Similar to the case for US citizens, it is unlikely to provide structural or tax benefits and may cause even more complexities, but it would provide a degree of privacy and branding if that is what you want. There may be other consequences such as the need to file a U.S. tax return or not if a non-U.S. investor makes investments through an entity like an LLC. That is something you should discuss with a qualified lawyer or tax advisor if considering.

How do I form an LLC?

The good news is that starting a generic LLC for general investment purposes is pretty easy. File with your secretary of state's office and pay a fee to get your LLC up and running. Each state has its own unique LLC formation requirements, so check what your state of residence needs. Alternatively, services like Stripe Atlas automate many of these formation steps. But, you may want to speak with a lawyer or tax advisor to determine what is best for your goals and specific situation.

So rest assured: Investing in your friend’s company or other deals that come your way as an individual should be sufficient. If you want the flexibility or specific benefits of an LLC, it’s relatively easy to create one.


*LLCs organized for investment purposes would offer tax advantages if formed within a retirement entity such as a Roth 401(k) or a Roth IRA, or you actively participate in the business activities in which the LLC invests.

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