Retail investors in Europe are constantly looking for ways to optimise their investment strategies, whether it’s trading in stocks, cryptocurrencies, bonds, futures, or CFDs. While most individuals invest through personal accounts, there is a more efficient way to handle your investments—through a legal entity. By investing or trading through a legal entity, you cannot only reduce your tax obligations, protect personal assets and grow a nest-egg but also build capital into the entity that can later be used to start a business.
In this article, we’ll dive deep into the advantages and challenges of investing through a legal entity, explain how to get started, and discuss how Investor 2.0 makes this strategy accessible to investors, even those with smaller portfolios.
What does it mean to invest through a legal entity?
Definition of a legal entity for investments
A legal entity, such as an LLC, OÜ (in Estonia), or a holding company, is a separate legal structure that allows individuals to pool resources and trade assets like stocks, cryptocurrencies, and bonds, etc. Unlike personal investment accounts, legal entities create a clear distinction between personal and business finances, which opens up significant benefits, particularly when it comes to taxes and risk management.
Who can benefit from a legal entity?
Investing through a legal entity is beneficial for:
- Retail investors with significant portfolios.
- Active traders involved in markets like cryptocurrencies, stocks, bonds, futures, and CFDs.
- Investors looking to build wealth within the entity that they can later reinvest or use to start a business.
By setting up a legal entity, investors can better manage large-scale investment activities while maintaining a structure that offers legal and financial advantages.
The key benefits of investing through a legal entity
1. Tax advantages
One of the most compelling reasons to invest through a legal entity is the tax benefits. These include but are not limited to:
- Deferral of personal income tax: By keeping profits within the legal entity and reinvesting them, investors can defer personal income taxes until the money is actually distributed.
- Lower corporate tax rates: In many European countries, corporate tax rates are lower than personal income tax rates. This difference can result in significant savings when realised gains are kept within the entity.
- Profit reinvestment: When profits are reinvested back into the entity rather than distributed to shareholders, they aren’t immediately taxed, allowing for more capital growth.
- Deducting losses: Some countries do not allow realised cryptocurrency losses be deducted from realised gains to offset capital gains tax as a natural person.
2. Risk mitigation
Investing through a legal entity separates your personal assets from your investment assets, which is a major safeguard in case of legal disputes, liabilities, or trading losses. A legal entity structure provides:
- Limited liability: If the entity faces a lawsuit or incurs debt, your personal assets (e.g., your home or personal bank accounts) are protected.
- Reduced exposure to risk: Since the legal entity is a separate entity, you’re not personally liable for any losses or issues that the business incurs.
3. Building capital for future business ventures
Another key advantage of using a legal entity for investments is the ability to accumulate capital. By growing wealth within the entity, you can eventually use the funds for business activities, such as launching a startup or expanding current operations, without having to first distribute profits and incur taxes.
Setting up a legal entity for investments
1. Choosing the right legal structure
Choosing the right structure depends on your investment strategy and the legal requirements in your country. Some common legal structures for investment purposes include:
- Limited Liability Companies (LLCs): Flexible and commonly used across Europe.
- Estonian OÜs: Popular for their favourable tax policies, especially for EU-based investors but requires an e-Residency card or to be an Estonian resident.
- Holding Companies: Often used by investors to manage large portfolios or multiple businesses.
2. Costs and administrative requirements
Setting up and maintaining a legal entity comes with administrative obligations such as:
- Initial setup costs: Depending on the country, setting up a legal entity can involve registration fees and legal costs.
- Annual compliance and reporting: You’ll need to submit annual reports, tax filings, and maintain accurate bookkeeping.
- Ongoing administrative costs: Maintaining a legal entity typically involves hiring an accountant or using professional services for compliance and reporting.
Legal and tax considerations for European investors
1. Understanding country-specific tax laws
Tax laws in Europe vary by country, but many offer favourable corporate tax rates for legal entities. Estonian OÜs, for example, are tax-exempt on retained and reinvested profits, which makes it a particularly attractive structure for long-term investors. However, the specific tax benefits you gain will depend on both the structure of the legal entity and the country where it is registered. For EU-based investors, it’s essential to explore the nuances of these systems to ensure that you are leveraging the right jurisdiction for your needs.
2. Reporting obligations
Investing through a legal entity means complying with specific reporting obligations such as:
- Annual financial reports: Most countries require legal entities to submit annual financial reports detailing assets, liabilities, and profits.
- Tax filings: Ensuring all profits and losses are reported correctly and on time is crucial for avoiding penalties.
The cons of investing through a legal entity
While investing through a legal entity offers numerous benefits, it’s important to understand the potential drawbacks:
1. Higher costs
Setting up and maintaining a legal entity involves costs that individual investors don’t face, including:
- Setup fees: Registration and legal fees to establish the entity.
- Accounting and legal services: Annual costs for bookkeeping, tax filings, and compliance management.
- Ongoing operational costs: Entities often have to pay for registered offices, administrative services, and other necessary overheads.
2. More friction in opening broker and bank accounts
Opening investment, brokerage or bank accounts for a legal entity can take longer and require more documentation compared to personal accounts. This extra administrative step can create friction, particularly for smaller investors.
3. Annual fiscal obligations
Once established, the legal entity must meet annual compliance obligations such as filing annual tax returns, dividend declarations and other financial statements. These obligations can be cumbersome and costly, especially for smaller investors managing lower trading volumes.
How Investor 2.0 makes legal entity investing accessible for all
Investing through a legal entity offers clear advantages, from tax savings to reduced personal risk. However, it comes with its challenges—higher costs, more complex reporting requirements, and friction when opening broker accounts.
That’s where Investor 2.0 comes in. By providing an Investment Purpose Vehicle (IPV) specifically designed for retail investors, Investor 2.0 offers a low-cost, efficient solution for those looking to invest through a legal entity. The IPV reduces the administrative burden while retaining the tax benefits and asset protection that come with legal entity investing, making it accessible even for smaller-volume investors.
With Investor 2.0, retail investors can enjoy the perks of legal entity investing without the typical headaches, paving the way for smarter and more profitable investment strategies.
