Self-Directed Investing in a Single Member LLC (with Qualified Funds)
A Single Member LLC, also known as an IRA-LLC, is a type of alternative investment where a private entity is wholly or majority owned by an IRA. After the LLC has been created, qualified funds from your retirement account are moved or invested into the newly created LLC business checking account.
From there, the manager of the LLC has complete control. All income and expenses related to the investments in the LLC can go through the LLC’s business checking account. However, the investments remain subject to all retirement account rules and regulations. For example, when the account owner wants to take a distribution, cash must be sent from the LLC’s business checking account back to the qualified account.
Operating Agreements for Single Member LLCs have special requirements:
- The LLC’s title cannot contain words like “bank,” “escrow,” “IRA,” “title company,” “trust,” or any such similar terms
- It must include a unilateral membership transferability clause in favor of the custodian, Provident Trust Group, LLC
- It cannot provide compensation to the LLC’s manager if the manager is the IRA owner or another Disqualified Person
You cannot participate in a prohibited transaction
When using retirement funds to invest in a Single Member LLC, it is important for the qualified account owner to understand the Internal Revenue Service (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 funds in the LLC’s business checking account are used for the personal benefit of the qualified account owner or another disqualified person.
- The account owner or a disqualified person will receive a personal benefit as a result of the investment.
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.
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 a Single Member LLC, 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.
- The manager of the LLC cannot take any compensation for managing the LLC.
- Provident Trust Group does not provide formation services for the LLC.
- Membership interest cannot be transferred or added without approval by Member and Manager.
- Provident Trust Group has the right to transfer membership to another custodian or disperse to the IRA holder without approval of management.
- In order to take a distribution, cash must be sent from the LLC’s business checking account back to the qualified account.
- You must provide a Fair Market Value of all assets held within the LLC annually.
Required Documentation
- Direction of Investment
- Articles of Organization (stamped)
- Copy of the Tax Identification Number
- Operating Agreement
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 and/or tax consequences. The correct vesting 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: What happens with income and expenses?
A: Because the LLC is the owner of the investment, all income and expenses can go through the business checking account.
Q: Can I take distributions directly from the LLC’s business bank account?
A: No. That would be considered a prohibited transaction.
Q: What can I purchase inside my IRA-LLC?
A: Any investment that is not considered prohibited by the IRS.
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.
