Crypto LLCs: How and When to Start a Crypto Business
Thinking about starting your own crypto business? Learn about crypto LLCs, including the pros and cons, and tax benefits in our guide to starting a crypto LLC.
What is an LLC?
A Limited Liability Company (LLC) is a type of legal structure that determines how a business is owned and operated. It offers liability protection and other benefits for business owners.
LLCs are popular because they provide a shield between personal and business assets, protecting individuals from personal liability for business debts and obligations. Depending on the structure, there may also be tax benefits.
Can LLCs own cryptocurrency?
Yes, LLCs in the USA can own, sell, and trade cryptocurrencies like Bitcoin and Ethereum. This ownership provides a layer of protection for the individuals behind the LLC, shielding their personal assets from potential liabilities related to crypto activities.
How are LLCs taxed?
LLCs are taxed as pass-through entities. This means that the LLC itself does not pay taxes. Instead, the profits or losses of the LLC are passed through to the owners, who report these on their individual tax returns.
However, the rules for LLC taxation differ for single-member LLCs and multi-member LLCs.
Sole members of an LLC are required to report profits or losses as income on their individual tax returns, typically using Form 1040. The IRS does not recognize a single-member LLC as a separate entity from the individual. This means that even if the owner does not withdraw cash from the LLC's bank account, they are still liable for income taxes based on the LLC's income.
Read next: How is crypto taxed in the US?
In the case of multi-member LLCs, each owner is taxed based on their share of profits and losses. It is crucial for owners to outline clearly in an operating agreement how profits and losses are shared. For example, if an owner owns 40% of a crypto LLC, they will typically be entitled to 40% of the LLC's profits, although this may vary depending on the operating agreement. Even if an owner chooses to reinvest their profits in the LLC's bank account, they are still required to pay taxes on their share of the income.
Multi-member LLCs do not pay taxes at the entity level, but they are required to file Form 1065 to ensure that each individual owner accurately reports their taxes. Additionally, the LLC must provide owners with a Schedule K-1 detailing their share in the business's profits or losses.
Should I start a crypto LLC?
Starting a crypto LLC can be a strategic move, but it comes with its own set of pros and cons to consider.
Crypto LLC pros
Write-off relevant expenses: Individuals operating as a trade or business within an LLC can write off relevant expenses, such as electricity costs for Bitcoin mining. Additionally, individuals operating as a trade or business within an LLC can write off casualty losses related to events like scams or wallet hacks.
Protect owners from liability: Owners in an LLC are generally not personally liable for business debts and obligations. This liability protection can be invaluable, especially in businesses with high-risk or volatility like crypto.
Protect owners' privacy: Setting up an LLC through an agent can help maintain privacy, as the owner's name may not be tied to the LLC in the state's public database. This privacy feature is particularly attractive to participants in the crypto world.
Crypto LLC cons
Expense and complexity: Setting up and operating an LLC can be expensive and time-consuming. There are initial setup costs, annual fees (in some states), and potential legal and accounting fees, particularly if your business involves cryptocurrencies.
Ongoing management: LLC structures can be complex from both a tax and operational standpoint. You may need to pay ongoing fees to tax professionals who can help you navigate the complexities of business tax law.
Single-member LLC taxation: For single-member LLCs, there is no difference in how your operations are taxed compared to filing as an individual. You would still be filing a Schedule C and paying the same tax rate on your income.
How to start a crypto LLC
Here's a step-by-step guide on how to start a crypto LLC:
Research and plan: Determine the specific objectives and activities of your crypto-related business. This could include cryptocurrency trading, mining, investing, or providing crypto-related services. Select a unique and appropriate name for your LLC. Ensure it is not already in use and check if it complies with state regulations.
Choose a state of formation: Decide in which U.S. state you want to form your LLC. Some states, like Wyoming, are known for their favorable crypto regulations. As well as this, you’ll need to designate a registered agent in your chosen state. A registered agent is responsible for receiving legal documents and notices on behalf of the LLC.
Prepare and file LLC formation documents: Prepare and file the Articles of Organization with the appropriate state agency. This document officially creates your LLC and includes essential information like the LLC's name, address, and the names of the members. You’ll also need to draft an Operating Agreement, which outlines the management structure, ownership percentages, and operating procedures of the LLC. While not always required by law, it's a crucial internal document.
Obtain an EIN (Employer Identification Number): Apply for an Employer Identification Number (EIN) from the IRS. This unique identifier is necessary for tax purposes and may be required for opening a business bank account.
Register with state authorities: Depending on the state, you may need to register with state revenue departments or other regulatory agencies for tax purposes or to obtain necessary licenses.
Open a business bank account: Choose a bank or financial institution and open a separate business bank account for your crypto LLC. This separation of personal and business finances is crucial for maintaining liability protection. Check out our guide to the best crypto friendly banks to help you get started.
Obtain necessary licenses and permits: Research and identify any specific licenses or permits required for your crypto business. This may include money transmitter licenses or other regulatory approvals, depending on your activities and location.
Secure cryptocurrency wallets and accounts: Set up secure cryptocurrency wallets and exchange accounts to handle your crypto transactions. Check out our guide to the best crypto wallets and best crypto exchanges to help you.
Compliance with tax obligations: Understand your tax obligations at the federal, state, and local levels. It’s wise to consult with a tax professional who specializes in cryptocurrency to ensure accurate reporting and compliance. If you don’t have a crypto accountant, find one in our crypto accountants directory.
Maintain records and accounting: Keep detailed financial records, including income, expenses, and transactions related to your crypto LLC. Koinly can help - and it’s free!
Comply with reporting requirements: Stay informed about any reporting obligations, especially if your state or the federal government introduces new regulations, such as the Corporate Transparency Act (CTA).
Starting and maintaining a crypto LLC requires careful planning and adherence to legal and regulatory requirements. You should always seek the guidance of a qualified and experienced advisor to help you.
LLCs vs. C-Corporations vs. S-Corporations
While LLCs offer distinct advantages, there are alternatives to consider, such as C-Corporations and S-Corporations. Each has its unique tax treatment and advantages.
C-Corporations are separate entities that file and pay their own taxes. They may retain profits or distribute them to shareholders as dividends. C-Corps can issue shares to new owners and can go public on a stock exchange. However, they are subject to double taxation, paying taxes at both corporate and individual levels.
S-Corporations blend the benefits of a C-Corp and LLC. They file their tax returns but may pass income through to owners. They cannot issue shares to many owners and have other limitations. S-Corps provide flexibility to be taxed either as a corporation or as a pass-through entity.
The choice between LLCs, C-Corporations, and S-Corporations depends on your business's specific circumstances, goals, and tax considerations. Consulting with a tax professional is advisable to make an informed decision.
New LLC Beneficial Owner Information (BOI) Reporting Requirements
Starting from January 1, 2024, the Corporate Transparency Act (CTA) introduces new reporting obligations for many entities, including LLCs. This legislation aims to combat money laundering and illicit activities involving shell corporations and similar entities. Reporting companies, including domestic and foreign corporations and LLCs, must comply with these mandates.
Existing reporting companies must provide Beneficial Owner Information (BOI) to the Treasury Department's Financial Crimes Enforcement Network (FinCEN) by January 1, 2025. Companies established or registered on or after January 1, 2024, have a 30-day window from their formation or registration acceptance date to report. Any changes in beneficial ownership or exemption status must also be reported within 30 days.
In September 2023, FinCEN proposed extending the deadline for certain reporting companies to file their initial BOI reports. Companies created or registered in 2024 would have 90 days to file their initial reports instead of the previous 30 days. This extension aims to reduce the burden on reporting companies and promote compliance with the BOI Reporting Rule.
Non-compliance with the CTA's reporting obligations or unauthorized disclosure of BOI can result in civil and criminal penalties, including monetary fines and imprisonment.
Your frequently asked questions
Do I need an LLC to mine crypto?
No, you don’t need an LLC to mine crypto, but having one can offer benefits. A crypto mining business structured as an LLC enables you to deduct business expenses and potentially reduces self-employment taxes. Our crypto mining tax guide has more information.
Can crypto be an LLC?
An LLC is a viable option for those who want to reduce personal financial liability and avoid personal responsibility in the event of bankruptcy or other legal situations. However, forming an LLC for crypto-related activities may require expertise in finance and cryptocurrency, given the unique tax regulations surrounding crypto assets.
Can you buy crypto under a business name?
Yes, it is highly recommended that businesses set up wallets with an associated business name when buying crypto. This helps separate personal finances from crypto business activities, simplifying reporting during tax season.
How do I buy crypto as an LLC?
Buying crypto as an LLC is similar to purchasing as an individual trader. You acquire crypto through accounts associated with the LLC, just as you would with an individual account. Many popular crypto exchanges support institutional accounts suitable for LLCs.