Single member or multi-member
What you need to know about LLCs before you invest.
A Limited Liability Company (LLC) is a type of business entity registered with the state. “Limited liability” refers to the protection this type of entity offers—LLC owners (called ‘members’) are protected from personal liability for business debts and claims. In other words, personal money or possessions cannot be targeted, and LLC owners stand to lose only the money they’ve invested in the LLC itself.
Like a partnership or sole proprietorship, an LLC is also a “pass-through entity,” which means that the LLC’s income passes through the business and to the LLC member(s), which in this case is the Individual Retirement Account (IRA). As such, the LLC isn’t taxed.
An LLC offers the limited liability benefit of a corporation and the single level of taxation of a partnership.
Common reasons investors choose LLCs
- It’s the simplest business entity to form and operate
- Your personal assets and IRA assets are insulated from risk, since you can’t be sued for anything outside of the LLC
- For real estate: property expenses can be managed through the LLC
Common risks when investing in LLCs
- Cost: you must pay filing fees when forming your LLC and annual fees based on state requirements
The Internal Revenue Service (IRS) has certain rules to keep in mind when considering an investment in LLCs.
- If an IRA is investing into an LLC, the account owners must be aware that the investments made in an LLC must adhere to the same rules regarding prohibited transactions and prohibited investment classes as investments made directly through a custodian.
- An LLC for investing purposes must be a newly formed entity. You cannot invest with your self-directed IRA through an LLC you have created previously for another purpose. It is your responsibility to set up your LLC.
- Since LLCs must be established and registered in a state, it is important to know the rules of establishing an LLC in your state. Each state may have different fees for registering or maintaining an LLC.
- LLCs may incur unrelated business taxable income (UBTI). Tax owed on this income must be paid from cash held within the IRA holding the LLC and filed on IRS Form 990-T. If your LLC investment incurs UBTI, consult a competent tax professional to prepare a Form 990-T and contact Provident for instructions on paying any taxes your IRA may owe.
Curious about your self-directed IRA options?
3. Send your supporting documentation
Along with your Direction of Investment form, you must provide the following:
-Copy of the Tax ID (EIN) confirmation from the IRS
-Articles of Organization
4. Receive a confirmation
You will receive an email confirmation once your request has been processed and your funds have been scheduled to leave your account.
You are responsible for performing due diligence on your investment. Every investment has unique risks and any decision to invest should only be made after you conduct a thorough review of the investment and any parties related to the investment. Provident Trust Group is a passive, directed custodian and as such does not provide any type of investment advice or due diligence.