How to Buy Stocks on Behalf of an LLC

By Brette Sember, J.D.

How to Buy Stocks on Behalf of an LLC

By Brette Sember, J.D.

A limited liability company (LLC) is a legal business entity formed under state law. The LLC has the benefits of protecting the owners, called members, from liability while still allowing simple pass-through taxation on the LLC's profits. LLCs can purchase stock, but there are some restrictions you need to know about.

Man looking seriously at papers at desk

Operating Agreement

One of the documents required to form an LLC is an operating agreement. This legal document names the members of the LLC and specifies their responsibilities, as well as detailing voting rights, capital contributions, changes in membership, and procedures for dissolution. The operating agreement also states whether the LLC is permitted to buy stock. If your operating agreement does not permit purchasing stock and you wish to do so, the members need to vote to amend the agreement to allow stock purchases.

The operating agreement also specifies which of the members are authorized to buy stock on behalf of the LLC. One or more members may be authorized to do so. The operating agreement can be amended to authorize more members than originally listed.

The operating agreement may list a specific procedure for how stock purchases are to be made and may also limit how much stock can be purchased, what kinds of stock can be bought, and how any gains or losses from stock is allocated among the LLC members. All of these provisions must be followed when the stock purchase is made.

Preparing to Buy Stock

When your LLC is preparing to buy stock, it's important to do your research so that you can make an informed decision. Learn about the company you are considering buying stock in. Read its financial reports. Google the company to get a sense of its public standing. Once you understand the company well, think carefully about whether the purchase will benefit your LLC and fit in with its investment strategy.

You will likely want to work with a broker to make your stock purchase, so you'll need to find a brokerage house and broker you are comfortable with and who understands your objectives. If you plan to buy publicly traded stock, you must use a broker to handle the transaction. When you open your brokerage account, be sure to do so in the name of your LLC, since it is the LLC that will be purchasing the stock, not you personally.

Buying the Stock

Once you've done your research and are comfortable with your decision, you can direct your broker to make the purchase on behalf of your LLC. Make sure you direct the broker regarding the purchase price and the number of shares you are authorized to buy.

When the stock purchase is made, it must be properly recorded in your LLC's records and will require a new asset line in your financial books. Its value will equal the amount you spent on the stock. Then make sure you decrease your cash account by the amount you spent on the stock.

Purchasing stock can benefit your LLC, but it is important to be sure it is done correctly. Once you've purchased the stock, your LLC can watch its investment grow.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.