Can You Actually Benefit From Starting an LLC for Cryptocurrency?

The past few years have seen an exponential increase in the popularity of the global cryptocurrency market. According to Allied Market Research, this market was valued at $1.49 billion in 2020 and is projected to reach $4.94 billion by 2030.

Cryptocurrencies are digital or virtual currencies that use an alternative form of payment via encryption algorithms. These currencies function both as a currency and as a virtual accounting system.

Specifically, this virtual currency uses blockchain technology to authenticate transactions. Instead of relying on banks to verify transactions, it uses a peer-to-peer system that enables users to send and receive payments from anywhere globally.

Crypto has several advantages, including faster money transfers and decentralized systems. At the same time, some disadvantages of cryptocurrencies include their price volatility and high energy consumption for mining activities.

Whether you are an experienced crypto trader or a newbie, it is very important to understand you can enjoy the benefits of creating an LLC for cryptocurrency and protect yourself from future liabilities. This article will explore an LLC, why it matters for crypto trading, and how to start one.

What Is an LLC?

A limited liability company (LLC) is a hybrid legal entity. It features some of the greatest characteristics of structures like a corporation, partnership, and sole proprietorship.

What makes this entity popular among budding entrepreneurs is its flexibility. Small businesses and startups can enjoy the same liability protection corporations have without the tedious paperwork. Their personal assets stay protected from any liabilities or debts their company may incur.

When a business is structured as an LLC, the court sees the venture as an artificial person. This means they are liable for their legal obligations when entering a contract. Additionally, in the US, LLCs are permitted to own and trade cryptocurrencies, such as Bitcoin and Ethereum.

Why LLCs Matter for Cryptocurrency

There are several advantages to developing a crypto LLC aside from liability protection and ownership flexibility.

Expense Write-offs

Let’s assume you are operating your LLC for crypto trading. If that is the case, you can write off relevant expenses through the Schedule C form. The form reports the income and expenses of a business you own as a single-member LLC.

Individuals operating as a trade or business can write off casualty losses due to scams and hacks.

Tax Advantages

Another benefit that makes LLCs popular for cryptocurrency is their tax advantages. Unlike other entities, LLCs don’t have a federal tax classification. The Internal Revenue Service (IRS) considers them pass-through entities, meaning their earnings go straight to their owners.

As a result, the company does not need to pay corporate taxes. Instead, the owners of the crypto LLC are taxed at a personal level.

Other entities like C corporations are taxed twice because their earnings are distributed to their shareholders. The corporation must pay corporate taxes, and its shareholders are compelled to pay through income taxes.

Management Flexibility

Corporations must have a fixed management structure. They need a board of directors that oversees their company policies and a set of officers that manage their daily operations.

On the other hand, LLCs are not required to have this formal structure. You can have more freedom to choose how you want to operate your crypto mining through an LLC entity.

Profit Distributions

When you create an LLC for crypto investing, you can distribute your profits in various ways. Crypto LLCs may opt not to share their earnings equally. For example, if an LLC has two owners and both agree that one will receive a bigger portion of the profit, it can do so.

Unfortunately, this kind of profit distribution doesn’t apply to corporations. They need to share their earnings according to the number and types of shares they hold.

Potential Downsides of Starting an LLC for Cryptocurrency

Complex Regulatory Environment

Although an LLC provides some liability protection, it doesn’t shield business owners from regulatory scrutiny. In fact, registering an LLC for a cryptocurrency venture could potentially draw more attention from regulators, as it implies a formalized business structure. 

Such a complicated regulatory landscape for cryptocurrencies entails expertise and ongoing legal counsel, adding to the operational costs and administrative burdens of running an LLC. 

Taxation Challenges

Cryptocurrency transactions, including trading, mining, and earning, have tax implications that vary based on jurisdiction and transaction type. Accounting for cryptocurrency transactions can also be challenging due to issues such as valuation and tracking cost basis. 

Without proper tax planning and accounting practices, LLC members may face unexpected tax liabilities, penalties, or audits, draining resources and hindering business growth.

Limited Banking Options

More often than not, banks are becoming wary of providing services to cryptocurrency-related businesses due to concerns about regulatory compliance, money laundering, and the perceived higher risk associated with the industry. 

As a result, the LLC may have difficulty opening and maintaining bank accounts, processing transactions, and accessing financial services. This can hinder the day-to-day operations of the business, increase transaction costs, and limit growth opportunities. 

What Are The Requirements Of Creating An LLC For Cryptocurrency?

If you want to create an LLC for cryptocurrency, here’s everything you need.

Registered Agent

Nevada requires all LLCs to have a registered agent. A registered agent is assigned to receive all of the official and legal documents on behalf of the LLC. They need to be available at an address within the state. You can name an employee your registered agent, but some companies typically use registered agent services.

Articles of Organization

Articles of Organization are legal documents with important information like your venture’s name, principal place of business address, and how you plan to manage your crypto LLC.

The State of Nevada requires you to file them through the Secretary of State. In most cases, you must pay a filing fee, which varies from state to state.

Upon the approval of the formation documents, you can get an official certificate of registration. You may also use your business license to get a tax ID, which is required for opening a business bank account.

Operating Agreement

While not every state requires an operating agreement, this document is vital for outlining everyone involved in the LLC’s financial, legal, and management rights. Typically, it discusses how profits will be distributed, who should contribute to your crypto LLC’s capital, and more.

An operating agreement is important, especially if you have a business partner. It ensures everyone knows their rights and responsibilities, regardless of what happens.

LLC vs C Corp vs S Corp: Which One Should I Open?

Exhibit A: LLCs

LLCs provide liability protection for owners while offering flexibility in management and tax treatment. In the context of cryptocurrency, forming an LLC can help protect personal assets from business liabilities associated with the volatile nature of the market. It also allows for pass-through taxation, simplifying tax reporting for cryptocurrency activities.

Exhibit B: C Corporations

A C corp can have potential tax advantages, such as the ability to deduct business expenses, but they are subject to double taxation—profits are taxed at both the corporate and individual levels. For cryptocurrency ventures aiming for significant growth and fundraising, especially through initial coin offerings (ICOs) or token sales.

Exhibit C: S Corporations

S corps are similar to C corps but have restrictions on ownership and are subject to pass-through taxation. While they offer liability protection and potentially simpler tax treatment, S corps may not be suitable for cryptocurrency ventures due to limitations on the number (100) and types of shareholders, as well as restrictions on foreign ownership.

Crypto LLC FAQs

Can a crypto LLC issue its own cryptocurrency tokens?

Yes, a crypto LLC is allowed to issue its own cryptocurrency tokens as part of its business operations or fundraising efforts. However, the issuance of tokens may be subject to regulatory requirements depending on the jurisdiction and the nature of the tokens.

How can a crypto LLC protect its intellectual property rights?

To protect intellectual property (IP) rights, such as trademarks, copyrights, and patents related to cryptocurrency technologies or business concepts, a crypto LLC can register its IP with the appropriate authorities. Additionally, the LLC can include provisions in its operating agreement to define ownership rights and restrictions on using proprietary information. 

Are there any ongoing compliance requirements for crypto LLCs?

Yes. Ongoing compliance requirements for a crypto LLC may include filing annual reports or statements with the state, paying annual fees or taxes, maintaining accurate financial records and accounting documentation, complying with state and federal tax laws, and adhering to any industry-specific regulations applicable to cryptocurrency businesses, such as anti-money laundering (AML) and know your customer (KYC) requirements.

How can I dissolve a crypto LLC if I no longer wish to operate it?

Dissolving a crypto LLC involves following the dissolution procedures outlined in the LLC’s operating agreement and complying with state regulations. This usually includes voting among the LLC’s members to approve the dissolution, filing dissolution paperwork with the appropriate state agency, settling any outstanding debts or obligations, and distributing remaining assets to the members according to their ownership interests.

Make The Right Choice Today

An LLC is a simple and adaptable business structure perfect for startups and small businesses. In the context of cryptocurrency, LLCs provide numerous benefits, including the legal protection you need to secure your personal assets while running your business.

Still undecided? Let our Nevada business formation experts help you decide if a Nevada LLC is the right entity for you by calling 1-800-508-1729.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.