By FindLaw Staff on September 09, 2021| Last updated on September 28, 2022
When you own a small business, it's all about income. A classic shop or store may have profits from sales or service. A startup may have venture capital money coming in. In either case, you might need to get a little more creative with your revenue streams. Individuals and investment funds can make money off the stock market, so why not your small business?
But before you start day trading with company funds, here's what you need to know about your small business investing in stocks.
Stocks, Funds, and Indexes: A Word of Caution
Just because youcaninvest in stocks doesn't mean youshouldinvest in stocks. Most small business owners and entrepreneurs are already focused on the company's day-to-day operations and don't have time to keep an eye on the market, much less execute a high number of stock trades. You're probably trying to simplify things, and the last thing your small business needs is a day-trading distraction.
But you don't have to pick and choose your stocks one at a time. You can also invest in an index fund that includes groups of stocks and is designed to mirror the stock market's performance as a whole. These can be less risky and require less maintenance over time.
Before you begin, consider the legal and tax implications of investing based on your business's structure.
Investing Through a Legal Business Structure
Most businesses register as legal entities through state regulatory authorities. With so many different entity types for owners to choose from, there are certain considerations you should take into account before investing through a business structure:
Can an S-Corp Invest In Stocks?
If your small business is incorporated as an S-corporation (S-corp), there areno more legal restrictions on stock purchases than placed on an individual. So most small businesses can buy and sell stock the same way a normal person does. You may need to pay more attention to how your small business will be taxed on any profits you make from dividends or stock sales.
As The Arizona Republic points out:
You may wonder: since there's no tax at the corporate level in an S corporation, can you sell the stock in the corporation and defer taxes on it for as long as you hold it in the corporation. Unfortunately, you can't. The moment you sell the stock, the profit on the sale flows out of the S corporation to you and becomes taxable income.
So, if you're going to play the market with company money, make sure you have aqualified tax attorneyon your side to keep it all legal.
Can a C-Corporation Invest In Other Companies?
C-corporations (C-corps) are typically larger entities with complex regulations. They can have unlimited investors and can sell shares of stock publicly. Owners of C-corps are subject to what's referred to as a double tax. This means that any profits are taxed at the corporate level and again at a personal level when the owners file their annual tax returns.
Despite the double tax, investing in businesses through a C-corp can still be highly lucrative under the right circ*mstances. C-corps that invest in foreign businesses are entitled to certain benefits that reduce taxes paid on the profits from those investments. Here, the corporation pays what's called a Global Intangible Low-Taxed Income (GILTI) tax. This tax ranges between 10.5-13.5%, much lower than the typical 21% federal corporate tax rate.
Can an LLC Invest In Stocks?
Limited liability companies (LLCs) can be a great way to reduce an owner's tax liability. That's because LLCs can choose to be taxed like S-corps, thus avoiding the double tax. Additionally, multi-member LLCs allow owners to pool their investment capital together according to the terms of their operating agreement.
LLCs are simple to establish and are a go-to for startups looking for a quick and easy path to liability protection. For this reason, investment experts often recommend that partners organize as an LLC before pooling their monies for investment. Keeping a diligent record of all investments made through the LLC would be best. Also, pay careful attention to avoid commingle your personal and business assets. Doing so could potentially remove the liability shield afforded through LLCs. Click here form an LLC in your state, including Texas and Pennsylvania.
Partnerships and Sole Proprietorships
LLCs (and their close relative, limited liability partnerships) protect owners' personal assets from the debts and obligations raised by the company. These protections extend to debts and losses raised through investments.
Alternatively, general partnerships and sole proprietorships offer no such protections. As such, it is not generally encouraged to purchase stock or make investments through these entities. Instead, owners should register their entities as LLCs or corporations before investing through the business. This can be done at any point during the life of a partnership or sole proprietorship.
Related Resources:
- Find Securities Lawyers Near You(FindLaw's Lawyer Directory)
- Investing Advice for the Small-Business Owner(The New York Times)
- Qualified Small Biz Stock Gains May Be Tax-Free(FindLaw's Free Enterprise)
- Obscure Delaware Law Could Force Small Biz to Open Books(FindLaw's Free Enterprise)
- Learn About Our DIY Business Formation Services (FindLaw Forms & Services)
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