As the global crypto market continues to mature, investors are now looking towards protecting their investments through the creation of appropriate asset protection structures. One such structure is the formation of an LLC to protect, not only your crypto assets, but also yourself from potential legal action. Subsequently, let us look at what is involved in Setting Up an LLC for Crypto Investing
Why Use an LLC for Crypto Investing ?
In the early days of the crypto space, investors and traders alike simply held crypto in their personal wallets and really didn’t take much of an interest in the tax or legality side of things. Anonymity was almost assured and not much came to pass as governments either chose not to regulate crypto or were simply behind the curve from a regulation perspective.
However, this has rapidly changed over the past 12 months and many national tax authorities, securities regulators, and the courts have stepped into the fray to provide a legal framework from which to rely upon. Subsequently, we are starting to see rules being enforced and, in some cases, retrospectively applied.
Additionally, crypto participants are now starting to bring legal actions against token issuers and investors, and we are seeing these sorts of cases starting to increase within the broader judicial system. Fair or not, the court system is now available, at least to those in the same jurisdiction as the crypto platform operator/investor, for those wishing to access justice relating to crypto transactions.
Does Using an LLC for Crypto Investing Provide Any Protection?
Certainly, in a U.S. sense, the Limited Liability Company (LLC) is one of the key components of a domestic asset protection structure. The LLC is an easily manageable structure which providers the members (similar to shareholders or owners) personal protection against the debts and liabilities of the company.
Subsequently, in the event of a lawsuit, or most forms of regulatory action against the LLC, the personal assets of the members are protected from liability. There are obviously some exclusions to the above, but the basic idea is that the LLC owns the crypto assets and you, as the member, own the LLC. This separates you from direct ownership of the assets.
In many cases, this is a strong enough liability shield to have in place to protect you from being personally responsible and having to bear any legal risk for the trades/business that the LLC undertakes. However, if your business is complex, or requires some form of financial licensing, then you may wish to have the LLC owned by an offshore trust which provides an additional layer of personal protection.
How Do I Form an LLC for Crypto Investing ?
In the US, it is a very simple process to form a Limited Liability Company and only requires the completion of the following steps:
Filing the Articles of Incorporation
These are the basic incorporation documents that list the proposed manager and members and provide the business address. Most states have their own forms to be completed and lodged.
Drafting of an Operating Agreement
This is important as the operating agreement details how your LLC is to be operated and managed. This document needs to be considered and completed in such a way as to survive any legal attempts to invalidate your LLC structure.
Applying for an EIN and Setting Up a Bank Account
It is highly likely that you will need to secure banking facilities for your newly formed LLC, and this will require an application for an Employer Identification Number (EIN) from the U.S. Inland Revenue Service. It’s an easy application that you can do yourself and lodge online with the IRS.
Once you have received an EIN you can easily source a local bank account or use a service like Wise. Ultimately, setting up a domestic LLC is incredibly simple and cheap and can cost you as little as US$50 to establish the entity. If you are looking to setup an offshore LLC, for additional protection, then you would need an offshore agent to form the structure for you and this, typically, costs quite a bit more.
Can an LLC Own Bitcoin and Other Cryptocurrencies?
Obviously, the answer to this depends on the country or jurisdiction you are currently operating in but, in general, the answer is YES. LLCs are normally able to hold almost any type of physical and intangible assets which also includes crypto.
How Do I Transfer Crypto Assets into an LLC’s Ownership?
Normally, any such transaction should really be conducted at “arm’s length” which effectively means that it’s a market transaction. In practice, you would need to use a basic contract of sale, of which there are lots of templates online, and then agree a reasonable market price for the LLC to purchase the crypto from you personally.
Upon execution of a sale agreement, the wallet keys would then be transferred to the LLC (Effectively you) and then be listed upon the balance sheet and financial statements as an asset.
Tax Implications of a Domestic LLC
For my U.S. based readers, the domestic LLC has plenty of tax advantages which sets it apart from a standard corporation. Firstly, the LLC is definitely a taxable entity, but you can elect for it to be treated as a Look Through Company (LTC) which effectively means it is taxed as a partnership and any income will flow through to the members and you will pay tax on it personally.
The U.S. domestic LLC is the perfect entity for crypto investors as it provides significant asset protection along with flexible tax options. This means that it is a relatively easy entity to operate and requires little in the way of professional management to stay compliant with local laws. Additionally, the tax flexibility of an LLC means you can choose to have the structure treated as a look through company and pay tax personally on any of the profits distributed to you.
Ultimately, if you are operating within the crypto space, you should be doing everything in your power to separate your personal assets away from those of your crypto operations. It’s still early days on the crypto legal scene but I expect there to be a significant increase in lawsuits in the near future.
If you do not have a liability shield in place for every eventuality than you could possibly face personal ruin from any token sale, yield farming, swaps, or DeFi operation. Subsequently, do yourself a favor and get a basic asset protection structure in place to save you from the potential future liability.