Would investing through an LLC protect me from personal liability if I blow up my trading account?
By - SirBuzzKillingtonVI
The broker might not allow you to you trade on margin if the LLC has no credit. A new LLC has no credit. This applies to trading on margin as you’d need credit. For example, if you were to rent an office space or apply for a loan for a new LLC they’d require an owner or key person to sign a personal guarantee making that person or entity liable for the debt. At some point, generally years after opening an LLC, the LLC will have enough credit to not require a personal guarantee.
The law of the state you open your LLC in decides what protection you would have. If the LLC is undercapitalized from the beginning, that might be enough to pierce the corporate veil.
Undercapitalization is a biggie. The other one is that for OP to profit off of this, the LLC has to pay them. If the LLC immediately disburses its gains to the owner, pays the owner wages that substantially consume its operating returns, or otherwise takes the lion's share directly off of those gains, then that's a very clear indication that the owner is operating the LLC as a mere alter-ego.
Your point that the broker might not extend margin credit to an institution with no collateral other than the account makes sense. But assuming that the broker asks for financials upfront and then indeed extends the credit (without a personal guarantee) based on truthful financials provided by the owner, does the broker have any standing to pierce the corporate veil to sue for losses when it was fully aware of the LLC's financial condition?
As u/derspiny brought up, there is the alter/ego principle of piercing the veil. As there are others.
Assuming your financials met their requirements, a court could still decide you were undercapitalized or agree to pierce the corporate veil under another theory.
You’d need to run it like an actual financial institution; follow your state’s LLC laws to a T; potentially have someone else or a board manage the LLC; and have other substantial expenses other than just drawing potential earnings to yourself. You’d probably need to give up a good amount of control in the LLC for better protection.
Ultimately, if you end up owing the broker a lot of money and the broker feels like they could get the veil pierced or that there is some kind of fraud going on, they’re going to try to come after you personally and they might prevail.
This makes sense, thank you.
Let's put it this way. If:
* You run your LLC in good faith, and
* You capitalize it properly, and
* You maintain separation between your LLC's finances and your personal finances, and
* Your LLC exists for a reasonable purpose beyond merely insulating you from liability, and
* Your brokerage actually agrees to extend those loans to you without a cosigner, and
* Your corporate records are adequate to defend an attempt to pierce the corporate veil anyways,
then your LLC will insulate your personal finances from its losses. If it goes belly-up, then its assets will be liquidated and your life will go on.
That's a lot of ifs, though. LLCs exist for the purpose of allowing people to pursue productive enterprise without being at risk of penury if those enterprises fail, not to let people dodge responsibility for their debts after benefitting from them.
Thank you for the thorough explanation of the factors and conditions involved.
You found the loophole!!
Jo No. They could potentially charge you with fraud.
On what basis? It's perfectly legal for institutions to have brokerage accounts. And institutions do occasionally blow them up.
Absolutely. What you’ve spelled out is intentionally betting with money you don’t have and walking away *if you lose*. How is that not fraud?
This is the dumbest shit I have read on here in a while.
To what end though? Can a junior trader at a hedge fund be personally liable for a bad trade that bankrupts the company?