The trend towards IRA investment is increasing, particularly in the realm of having an IRA fund your LLC. One of the main advantages to having an IRA funded LLC, is that you are able make investments more freely. The IRA funded LLC allows you to maintain checkbook control, meaning you can write checks for investments without the need for a custodian. This is advantageous because it reduces the fees paid to a custodian and frees you from the need for custodian approval for each check written.
In order to have your IRA fund your LLC, the first thing to do is to open a self-directed IRA account, which is a type of IRA where an IRA owner makes all the investment decisions and instructs a custodian to act. Pursuant to IRS regulations, either a qualified trustee or custodian must hold the IRA assets on behalf of the IRA owner. Various companies, such as Pensco, Sterling Trust, and Equity Trust, all act as IRA custodians. Once you have chosen a custodian, you must instruct the custodian to transfer your IRA assets to the new self-directed IRA account. Be aware that while the IRS does not mandate what transactions you may engage in, there are certain prohibited transactions outlined in IRC § 4975(c)(1), which are either direct or indirect:
- Sale or exchange, or leasing of any property between a plan and disqualified person;
- Lending of money or other extension of credit between a plan and a disqualified person;
- Furnishing goods, services, or facilities between a plan and a disqualified person;
- Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
- Act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest of for his own account; or
- Receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
For purposes of this statute, a disqualified person is the IRA owner, the IRA owner’s spouse, ancestors, lineal descendents, spouses of lineal descendents, investment advisors, fiduciaries (those providing services to the plan) and any business entities, in which any of the persons previously mentioned have a 50% or greater interest in. However, pursuant to Swanson v. Commissioner, 106 T.C. 76, the IRA LLC strategy is not considered a prohibited transaction.
After opening a self-directed IRA account, you must then register your business entity as a limited liability company (LLC) with the Secretary of State in the state you plan on incorporating in. After your LLC is properly registered, the next step is to prepare an operating agreement, which meets all of the requirements for a self-directed IRA LLC mandated by the Secretary of State, such as specific language relating to the fact that the LLC is set up for your IRA.
After preparing a complete and accurate operating agreement, the next step is to set up a bank account for your LLC. Then, when you are ready to invest into your LLC, instruct the custodian to place the IRA assets into the bank account or brokerage account for the LLC. As manager of the LLC, you will have what is referred to “checkbook control,” which gives you the ability to execute transactions on the LLC level without the involvement of the IRA custodian. In other words, once the LLC is funded, you no longer need the custodian to write the checks.