Updated July 10, 2020:

Can a self-directed IRA invest in an LLC? Clients who want more control of managing their IRA investments tend to create single-member LLCs. A single-member LLC is defined as a private entity that's solely owned by an IRA. They may be able to invest in other assets such as private equity or real estate. The IRA is the only member of the LLC, while the manager is the IRA account owner. 

What is an LLC?

An LLC, or limited liability company, is a legal structure providing tax advantages to partnerships by the Internal Revenue Service. It also decreases the risk of liability of owners or partners similar to how a corporation would. Members are those who have ownership interests in LLCs, unlike those who own shares in “S” or “C” corporations.

These investments are called membership units and have interests instead of shares of stock. Those who want to invest in LLCs are required to meet the state regulations first. These structures can be created under laws in specific states and within their jurisdictions. Entities and people who would like to invest in these types of corporate structures need to meet any state regulations.

An essential factor to consider when individuals are creating these corporate structures is making sure the correct language is in the LLC operating agreement. This will allow the LLC to obtain pass-through tax status similar to a partnership.

Reasons for Investing IRAs in LLC

Investors who pick the single-member LLC approach do it because they like the protection an LLC gives them. They also have more flexibility when it comes to managing associated expenses. Property expenses for real estate can be managed through the LLC bank account to pay for unexpected repairs or maintenance. This can be helpful when the LLC is selling or buying property. 

It's more efficient to deal with transactions within the LLC instead of buying them through an IRA directly. This also allows the LLC to only pay the custodian one asset maintenance fee instead of paying maintenance fees to several properties. Clients may be presented with an opportunity for investment, but don't have sufficient funds in their IRA to buy the asset on their own. If this is the case, the IRA funds can be combined with other investors to purchase the asset together. 

To do this, the client's IRA is directed to invest as a member in addition to the other investors. The IRA will become a member of the LLC, and the funds in it are put into the investment venture. Examples of these include companies that are closely-held or those investing in an apartment building.

Diversify Your Portfolio

Using a self-directed IRA to invest in assets that aren't traditional is a way to diversify a portfolio. This helps even out any yearly returns. LLCs are one of several options to help people with savings accounts that are self-directed. LLCs that provide pass-through tax treatment don't get taxed at a corporate level. This allows any profits of the company to flow through to IRAs or other types of self-directed savings accounts.

An LLC can choose to be incorporated in the same state where investments are made so the owner of the IRA won't pay extra filing costs. According to Internal Revenue Code Section 408, IRAs are tax-exempt. Most of the time, all gains and income obtained by the LLC would go back to the IRA tax-free.

The IRA owner can have more responsibility for their retirement funds by keeping the funds in the IRA at an LLC bank account.
Nearly any kind of investment opportunity can be invested in with a self-directed IRA. This includes the following: 

  • Raw land.  
  • Precious metals.  
  • Foreign or domestic real estate.  
  • Private businesses.
  • Peer-to-peer lending. 

Possible Risks When Investing in an LLC

A self-directed IRA can choose to invest in LLCs, but it's essential that the LLC sticks to the rules of the IRS. This is especially true of rules about disqualified parties or prohibited transactions. It's also important to know that LLCs might generate income that could possibly create a tax liability for the IRA.

If you need help with having a self-directed IRA invest in an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.