Can you provide input on IRA Owned LLCs?

Question: Quincy can you give us input on whether we need to set up an IRA LLC or is there a better entity for self directed IRA’s? Is selling interest in a LLC the best way to pool IRA money?

Answer: The question of whether to set up an LLC for a particular transaction or series of transactions depends on a lot of factors.  For example, are you going to use the LLC for transactions on a regular basis, or is the LLC set up for a single transaction?  What is the cost of setting up the LLC in the state where you are located?  Are there any income or annual fees to maintain the LLC?  How much will the LLC cost to set up and maintain?  As I always say, “every port of refuge has its price.”  You simply have to analyze the costs and decide whether or not it is worth forming an LLC for your anticipated investments.  I have seen many people use trusts as a viable and less expensive alternative to LLCs, but once again there may be state law issues which affect your decision.

Another question is who will manage the LLC?  Personally, I believe it is not a great idea for an IRA owner to manage an LLC which the IRA owns, for a lot of reasons.  I understand that guidelines on IRA owned entities have been written by the Department of Labor and are under review by the IRS prior to being released sometime later this year.  These guidelines will hopefully shed light on a lot of the issues facing IRA owned entities.

Another factor to be considered is whether or not the operation of the LLC will subject the IRA to Unrelated Business Income Tax (UBIT).  If an IRA operates a business, either directly or through a non-taxable entity such as an LLC, the owing IRA will be subject to taxation and will need to file a Form 990T each year (unless that LLC elects to be treated as a C corporation for tax purposes).  This may impact the return and complicate matters somewhat, but does not at all mean the project shouldn’t be considered (I have investments in my retirement plan that require me to file a 990T each year).  It is conceivable or perhaps even probable that the continuous purchase and sale of notes in the LLC would cause the owning IRAs to owe UBIT, if that is your intent.  You should note that no disqualified person (including, but not limited to, the IRA owners and their immediate familymembers) may receive any current benefit from the transactions engaged in by the LLC.  For example, no commissions may be earned by any disqualified person for purchasing notes within the LLC.

The answer to your second question has significant Securities and Exchange Commission issues, so if you form an LLC and sell its shares you will want to be careful not to make it a “public” offering, or at the very least you should consult with a securities attorney prior to raising capital.  A full discussion of the securities law implications is beyond the scope of a quick email, and is subject to who the members of the LLC are and how they acquire the membership interests.  I have used both trusts and LLCs to accumulate funds for investments, but I have always dealt with immediate family members and close associates, not the “public.”  I am not an expert on securities laws, I just know enough to be dangerous.

Of course you should also realize that any particular asset may be held directly by an IRA as opposed to owning the asset through an LLC.  Depending on the complexity of the transaction and the volume of activity, direct ownership by the IRA or IRAs may be sufficient to meet your needs.

I apologize for the delay in answering your questions. If I can do anything for you, please let me know.  Have a great day!

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