Owners looking for greater control and privacy with their IRA investments are well suited to using an LLC as they offer more control and privacy. Investments requiring hands-on involvement or with potential liability risk may also benefit more from using an IRA LLC than using a traditional self-directed IRA with custodian.
An IRA LLC provides investors with access to IRS-approved alternative investments; however, prohibited transactions must be avoided like investments with disqualified persons or self-dealing.
Limited Liability
An LLC provides owners with protection by keeping their personal assets separate from those of the business, which is especially helpful when investing in real estate or private equity which requires more due diligence than stock and bond investments.
Real estate investors who desire greater control of their funds often opt for investing their IRA in an LLC, as this grants signing authority on contracts entered into through it and access to an LLC business checking account for more efficient funding of transactions.
However, an IRA owned LLC should take great care not to mix funds from personal assets with those belonging to the business or else its tax-advantaged status may be at stake. Furthermore, an operating agreement must clearly state how the business will run and help prevent disputes among owners by setting out such issues as management structure and voting rights, transferability of ownership interests as well as how profits, losses and expenses will be divided among shareholders.
Pass-Through Taxes
An LLC is a legal structure which offers limited liability protection and pass-through taxation, protecting IRA owners’ personal assets from being mixed up with business debts and liabilities.
Self-directed IRA investors frequently opt to form an LLC alongside their SDIRA as an extra layer of protection. When creating their LLC, investors will typically apply for an Employer Identification Number (EIN), while also needing a registered agent as the physical address for the business.
An LLC with a self directed IRA allows an investor to invest without needing approval from a custodian, thus eliminating transaction fees and delays in processing.
While an LLC can be an effective way of investing alternative assets, it’s crucial that its operations abide by IRS rules on prohibited transactions and disqualified persons. This means avoiding investing in life insurance policies, collectibles, gems and jewelry purchases from dealers that lack sufficient purity as well as real estate investments.
Flexibility
An LLC (Limited Liability Company) is a type of state-recognized business entity which provides limited liability protection and pass-through taxation, making them a popular choice for self-directed IRA owners looking to invest in alternative assets such as real estate or cryptocurrency.
However, investing in an LLC requires more than opening an ordinary bank account and writing checks; its owner must also take precautions not to engage in prohibited transactions, such as investments with disqualified persons or self-dealing activities.
To avoid making these costly errors, many investors choose a single-member LLC for their investments, which provides their IRA owner with “checkbook control”. This enables easier and faster transaction processing including real estate auctions, earnest money deposits and wire transfers when buying properties; tracking expenses like rental payments and utility bills as well as saving transaction fees are made simpler with such an entity structure.
Privacy
Self-directed IRA LLCs provide investors with greater flexibility and privacy, but must meet certain IRS requirements to qualify as such. An EIN must be acquired, as well as filing specific tax forms to make this arrangement tax exempt and operate under its own operating agreement with specific language that indicates they operate under a self-directed IRA umbrella.
While not all SDIRAs require an LLC structure, LLCs are the ideal way to manage “active” investments such as rental real estate or other hands-on assets. An LLC’s “checkbook control” enables the IRA owner to make investments without going through their custodian, as well as simplify recordkeeping, tax filings and asset management for multiple SDIRA investments consolidated under one entity. Tune into our podcast episode on these differences between traditional Self-Directed IRAs and those with LLCs as well as strategies, legal structures, tax rules as well as common investments like real estate, precious metals funds/companies/notes or cryptocurrency!
