Self Directed IRA LLC: Everything You Need to Know
A self-directed IRA LLC could be a good choice if you want to establish a business to hold non-traditional assets. 3 min read
Self Directed IRA LLC
A self-directed IRA LLC could be a good choice if you want to establish a business to hold non-traditional assets. An LLC, also referred to as a limited liability company, is a separate legal entity from its owners. The LLC owners, also known as members, have limited liability protection against the debts and obligations of the business.
Benefits of Forming an IRA LLC
There are many benefits to forming an IRA LLC and some of these benefits include:
- Ability to purchase non-traditional assets
- Checkbook control
- Limited liability protection
- Ability to pool assets
- Creating a formal business and managerial structure
- If the investment itself is complex, an IRA LLC might actually be required
One of the main reasons why people form an IRA LLC is to use their IRA assets to purchase investments in non-traditional assets. Generally, IRA custodians preclude certain investments, which can make it difficult to contribute to traditional investments, such as stocks and bonds, along with other traditional-type investments, as well as non-traditional investments.
An IRA LLC owner has complete control over the funds of the IRA LLC. Therefore, the owner will have signatory control over his or her own retirement funds. The way in which this works is that the owner can create a business checking account that will hold the LLC assets – the retirement assets. This offers greater investment flexibility as the IRA holder can manage his or her own retirement assets with ease.
Limited Liability Protection
As with any LLC, the owners of an IRA LLC cannot be held personally liable for the debts of the business. However, keep in mind that there are several exceptions to this rule. And if the plaintiff or creditor is able to “pierce the corporate veil,” then the owner can be held personally liable.
If someone wants to purchase an asset but cannot do so since he or she doesn’t have enough funds, then other investors can pool their funds to purchase the asset. The best way to do this is by creating an IRA LLC. And since LLCs don’t have a cap on the maximum number of owners, there can be an unlimited number of owners who can pool their funds to purchase an asset.
Formal Business Structure
When there are multiple people owning an expensive asset, there are several rules and guidelines to adhere to. For this reason, it is beneficial to create an IRA LLC to have a formal business structure setup. You’ll want to avoid any potential legal issues that could arise between investors by forming an IRA LLC that can protect all owners. When forming your LLC, you will need to draft the Articles of Organization and an Operating Agreement, which will be legally binding in the event of a lawsuit amongst owners.
If you purchase a complex asset, then an IRA LLC is required. An example of this would be if you wanted to use your IRA assets to purchase a large real estate building with 30 apartment units. In this case, you will not want your IRA custodian to mange the daily operations of the building, nor will you necessarily have the time to do so. In this case, you should create an IRA LLC and hire a third party manager to deal with the operations, which can include expenses, rent checks, lease documents, etc.
Rules to Avoid for Your IRA LLC
There are certain prohibited transactions that you cannot engage in when operating your IRA LLC, and these including the following:
- The IRA LLC cannot pay money to the RIA owner or any member of the owner’s family
- The IRA LLC cannot distribute or sell property to the owner or any member of the owner’s family, i.e. the business cannot give away property or sell it to the owner or family
- The IRA LLC cannot allow the owner or any family member to use property that belongs to the IRA LLC, i.e. they cannot live at the investment property that is owned by the business
- The IRA LLC owner and family members can’t provide services to the business
- The owner and family members cannot pay the expenses of the business
- The IRA LLC also can’t engage in any of the above-mentioned transactions with a fiduciary, which is a person who provides services to the business or one who owns 50% or more of the business
If you need help learning more about an IRA 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.