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Self-Directed Investing in a Limited Liability Company or Limited Partnership (with Qualified Funds)

Feb 5, 2019

Investing in a Limited Liability Company (LLC) or Limited Partnership (LP) has become a popular instrument and involves ownership interest in companies that are not publicly traded on a stock exchange. Investors in LLCs are called members while investors in LPs are called partners. The members/partners pool funds to invest in things like trust deeds, real property, etc. Any income generated by these investments flows back into the LLC or LP to be reinvested or distributed to the members/partners. The LLC or LP may file a K-1 each year reporting each member’s/partner’s share of the earnings. When qualified funds are used to invest in LLCs or LPs, the member/partner is “Provident Trust Group, LLC FBO qualified account owner’s name and account type (IRA or Roth IRA)” and the tax ID number is that of the custodian.

Usually, an LLC/LP will have an Operating Agreement or Partnership Agreement, an Investor Questionnaire, and/or a Subscription/Purchase Agreement. The qualified account Custodian signs on behalf of the new member/partner. The qualified account cannot be the Managing Member of an LLC or the General Partner of an LP. In addition, once the LLC/LP is funded, no further contributions or capital calls may be allowed if the qualified account, qualified account Owner and any disqualified persons combined own 50% or more of the LP/LLC.

Normally earnings on investments held within a qualified account are not taxed until the account Owner takes a distribution. However, sometimes the LLC or LP generates Unrelated Business Taxable Income (UBTI). If an LLC or LP generates UBTI it may be reflected on the K-1. If the investment has UBTI the qualified account must file Internal Revenue Service (IRS) Form 990-T and pay the UBTI. This tax must be paid from cash held in the qualified account. The account Owner’s tax advisor or CPA prepares the 990-T and Provident Trust Group signs as the Custodian.

Provident Trust Group can typically hold investments in U.S. based companies whose holdings include foreign investments if the asset can be valued annually in U.S. dollars.

LLC or LP Investments can be done:

  • Through a fund
  • Directly in a company

There are several ways you can structure an investment in an LLC. For information on single member LLCs please see “Investing in a Single Member LLC with Qualified Funds”.

 

You cannot participate in a prohibited transaction

When using retirement funds to invest in an LLC or LP it is very important for the qualified account owner to understand the IRS rules and regulations to avoid engaging in a prohibited transaction with a disqualified person that could lead to a complete distribution of the account with taxes and penalties incurred. A prohibited transaction is any improper use of the retirement account by the account owner, beneficiary or any disqualified person.

 

A “disqualified person” includes, but is not limited to:

  • Yourself
  • Your lineal ascendants and descendants
  • The spouse of a lineal descendant
  • Your spouse
  • Any entity that is owned 50% or more by disqualified persons
  • An entity that is controlled 50% or more by disqualified persons

Examples of prohibited transactions include:

  • The qualified account is a Managing Member or General Partner of the LLC or LP.
  • If it is an existing entity and the qualified account and/or a disqualified person owns 50% or more of the LLC or LP.
  • The qualified account and/or a disqualified person controls 50% or more of the LLC or LP.
  • The qualified account owner works for the LLC or LP.
  • The account owner or a disqualified person will receive a personal benefit as a result of the investment.

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Our Self-Directed IRA allows you to invest in what you want, when you want. The investment possibilities are endless.

Discover the power of true self-directed investing

Our Self-Directed IRA allows you to invest in what you want, when you want. The investment possibilities are endless.

When using your qualified account to invest in an LLC or LP, there are a few key items to remember:

  • 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 related parties. Provident Trust Group is a passive, directed custodian and as such does not provide any type of investment advice or due diligence.
  • All income, such as dividends, generated by the investment must be paid to your qualified account.
  • The qualified account must be a passive member of the LLC or LP. The qualified account cannot be the Managing Member of an LLC or the General Partner of an LP. In addition, once the LLC is funded, no further contributions or capital calls are allowed if the qualified account, the account owner and/or any disqualified persons own 50% or more of the LLC.
  • If an LLC or LP generates UBTI it may be reflected on the K-1. If the investment has UBTI the qualified account must file IRS Form 990-T and pay the UBTI. This tax must be paid from cash held in the qualified account. The account owner’s tax advisor or CPA prepares the 990-T and Provident Trust Group signs as the Custodian. Provident Trust Group does not determine when UBTI is generated. Generally this information is provided by the investment company or by a CPA or tax professional.
  • You must provide a Fair Market Value of all assets held in your qualified account annually.

 

Required Documentation

 LLC

  • Direction of Investment Form
  • Copy of the Tax Identification Number (LLC)
  • Articles of Organization (stamped) or Certificate of Good Standing
  • Private Placement Memorandum (PPM) (if applicable)
  • Operating Agreement
  • Subscription/Purchase Agreement (if applicable)
  • Final Exhibits (if applicable)

LP

  • Direction of Investment Form
  • Copy of the Tax Identification Number (LP)
  • Certificate of Limited Partnership
  • Limited Partnership Agreement signed by the partners

 

Investment Titling

You and your qualified account are two separate entities and your qualified account is considered the legal owner of this investment. As such, all documents must reflect this ownership. Failure to title the asset correctly may cause delays or tax consequences. The correct titling for all investment documents should be as follows:

“Provident Trust Group, LLC FBO: your name and account type

 

Resources

IRS Publication 590A – Contributions to Individual Retirement Arrangements (IRAs)
https://www.irs.gov/pub/irs-pdf/p590a.pdf

 

IRS Publication 590B – Distributions from Individual Retirement Arrangements (IRAs)
https://www.irs.gov/pub/irs-pdf/p590b.pdf

 

IRS Publication 598 – Tax on Unrelated Business Income of Exempt Organizations
https://www.irs.gov/pub/irs-pdf/p598.pdf

 

Internal Revenue Code 4975 – Tax on prohibited transactions
https://www.law.cornell.edu/uscode/text/26/4975

 

 

Frequently Asked Questions

Q: Can my qualified account invest in an LLC or LP that I or a disqualified person owns?

A: If your qualified account invests in an LLC or LP that you or a disqualified person owns or controls, the investment could be a prohibited transaction.

Please Note: Provident Trust Group and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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