Can a Small Business Invest in Stocks?

It’s all about the income when you own a small business. A traditional shop or store might make profits from sales, or both. Venture capital money might be available for startups. In either case, it might be necessary to be more creative in your revenue streams. You can make money on the stock market for both individuals and investment funds, so why not your small business too?

Before you trade with company funds, here are some things you should know about investing in stocks for your small business.

Stocks, Indexes, and Funds: A word of Caution

Just because you can invest in stocks doesn’t mean you should invest in stocks. Many entrepreneurs and owners of small businesses are already too busy running their business and don’t have the time to keep an eye on stock markets. You are probably trying to simplify your business and don’t need a day-trading distraction.

You don’t have the obligation to pick and choose individual stocks. An index fund is a fund that includes a number of stocks and is designed for the overall performance of the stock market. These funds are less risky, and require less maintenance over the long-term.

Before you invest, make sure to consider the tax and legal implications of doing so based on the structure of your business.

Investing Through A Legal Business Structure

Most businesses register as legal entities with state regulatory authorities. There are many entity types available to owners, so there are some things you should consider before investing in a business structure.

Can an S-Corp Invest in Stocks?

If your small business is incorporated as an S-corporation (S-corp), there are no more legal restrictions on stock purchases than placed on an individual. Most small businesses can buy and trade stock the same as a person. You should be more aware of how your small business will be taxed on any dividends received or stock sales.

The Arizona Republic points out that:

You might wonder, given that there is no tax at the corporate level of an S-corporation, if you can still sell stock in the corporation and avoid taxes while you own it. Unfortunately, you can’t. You can’t. The profit from the stock sale is transferred to you by the S corporation and becomes taxable income.

So, if you’re going to play the market with company money, make sure you have a qualified tax attorney on your side to keep it all legal.

Can a C-Corporation invest in other companies?

C-corporations (Ccorps) are larger entities that have complex regulations. They can have unlimited investors, and can also sell stock publicly. C-corp owners are subject to what is known as a double income tax. This means that profits made by C-corps will be taxed at both the corporate and personal levels when owners file their annual tax returns.

Double tax aside, investing in businesses through C-corps can still be very lucrative if done right. C-corps who invest in foreign companies are entitled to certain tax benefits. This tax is called the Global Intangible, Low-Taxed Income Tax (GILTI). This tax is lower than the standard 21% corporate tax rate and ranges between 10.5-13.5%.

Can an LLC invest in stock?

LLCs (limited liability companies) can help owners reduce their tax liability. LLCs can opt to be taxed the same as S-corps. This avoids double tax. Multi-member LLCs enable owners to pool their investment capital in accordance with their operating agreement.

LLCs are easy to set up and provide a simple route to liability protection for startups. Investment experts often recommend that partners create an LLC before pooling funds. It is a good idea to keep a detailed record of all investments made through the LLC. You should also be careful to ensure that your personal and business assets are not mixed up. This could remove the liability shield provided by LLCs.

Partnerships and sole proprietorships

LLCs and their related limited liability partnerships protect the personal assets of the owners from any debts or obligations incurred by the company. These protections include losses and debts that are incurred by investments.

However, sole proprietorships and general partnerships do not offer such protections. It is generally not encouraged to invest in stock or through these entities. Owners should register their LLCs or corporations to avoid investing through their business. This can be done at anytime during the lifetime of a partnership or sole proprietorship.

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Cyndy Lane

Cyndy is business journalist with a focus on entrepreneurship and small business. With over a decade of experience covering the startup and small business landscape, Cyndy has a reputation for being a knowledgeable, insightful and approachable journalist. She has a keen understanding of the challenges and opportunities facing small business owners and is able to explain them in a way that is relatable and actionable for her readers.