How do IRA-Owned LLC Interests Work?

An IRA-owned LLC Interest, also known as a Wholly Owned LLC, is a unique investment structure within a Self-Directed IRA (SDIRA) that offers the account holder more flexibility and control over their investments. This article outlines how LLC Interests work, the process of establishing one, funding it, and maintaining compliance with IRS regulations.

What is an IRA-Owned LLC Interest?

An LLC Interest refers to a Limited Liability Company that is 100% owned by an SDIRA. The account holder (IRA owner) or a designated manager manages the LLC, which serves as a vehicle for making investments. This structure is commonly referred to as a Checkbook Control IRA. With Checkbook Control, the account holder gains the ability to write checks and make investments directly through the LLC without needing to go through the custodian for each transaction.

While this structure offers greater control, it requires the account holder to maintain proper record-keeping, adhere to IRS rules, and follow the required filing processes to avoid penalties or disqualification of the IRA.

Steps for Establishing and Operating an LLC Interest

Establishing the LLC Interest:
- Work with Your Advisor or Business Representative: AET does not allow clients to independently form an LLC and add it into their IRA. If a client wishes to establish an LLC within their IRA, they must work directly with their Advisor or Business Representative. This ensures that all necessary IRS rules and requirements are followed during the LLC formation process.
- Creation of the LLC: The Advisor or Business Representative will assist the client in setting up the LLC. They will handle the necessary paperwork and ensure the LLC is structured properly to comply with IRS regulations. The LLC name will typically reflect its IRA ownership (e.g., "ABC Investments, LLC, a Wholly Owned LLC of [Account Holder's Name] IRA").
- Obtaining the EIN: The Advisor or Business Representative will also assist in obtaining an Employer Identification Number (EIN) for the LLC. This is necessary for the LLC to open a business bank account and perform other legal activities, such as entering into contracts or hiring employees, if applicable.
- Operating Agreement: The operating agreement of the LLC must clearly state that the IRA is the sole member and owner. The client may act as the manager, but must be careful to avoid prohibited transactions. This agreement will be submitted to AET for review and approval.
Funding the LLC Interest from the SDIRA:
- Submit a DOI (Direction of Investment): Once the LLC is formed, the client must submit a DOI through the AET online portal, directing funds from their SDIRA into the LLC Interest. This DOI must include all relevant details about the LLC’s bank account, the purpose of the investment, and supporting documents.
- Fund Transfer: After the DOI is approved, AET will transfer the funds from the SDIRA to the LLC’s business bank account. This step is managed by AET in conjunction with the client’s Advisor or Business Representative.
- Checkbook Control Setup: Once the LLC is funded, the client (or designated manager) will have checkbook control over the LLC’s business bank account. This allows them to make direct investments on behalf of the IRA without needing custodian approval for each transaction.
Ongoing Compliance and Record-Keeping:
- Maintain Separation of Funds: The client must ensure that all LLC transactions are kept separate from personal accounts. Mixing personal funds with LLC funds is prohibited by IRS regulations and can result in penalties.
- Annual Reporting: The client must submit a Fair Market Value (FMV) report of the LLC Interest’s assets to AET annually, which is used for IRS reporting (Form 5498).
- Prohibited Transactions: The client must avoid any prohibited transactions, particularly those involving disqualified persons (e.g., the account holder or family members). Violations can result in severe penalties and disqualification of the IRA.
- Record-Keeping: The client is responsible for maintaining accurate records of all LLC transactions, investments, and financial activities. These records must be available for IRS reporting and provided to AET if needed.
Redemption or Dissolution of the LLC Interest:
- Redemption of LLC Assets: When the client wishes to liquidate the LLC Interest’s assets, they must follow AET’s procedures for redemption. Proceeds must be returned to the SDIRA, and no funds can be distributed directly to the client.
- Dissolution of the LLC: If the LLC Interest is no longer needed, the client can work with their Advisor or Business Representative to dissolve the LLC according to the state’s procedures. All funds from the LLC must be returned to the SDIRA.
- Closing the Investment: After the LLC Interest is dissolved, the client must submit final documentation to AET, including a closing bank statement that confirms all funds have been returned to the SDIRA. The LLC Interest will then be closed in AET’s system.

Responsibilities of the Account Holder and AET

Account Holder Responsibilities:
- Work with an Advisor or Business Representative to establish the LLC Interest.
- Ensure that all transactions are compliant with IRS regulations and keep LLC funds separate from personal assets.
- Submit required documentation to AET, including the annual FMV report.
- Maintain accurate records and avoid prohibited transactions.
AET Responsibilities:
- Review and approve the formation of the LLC Interest, ensuring all IRS guidelines are met.
- Process the DOI to fund the LLC Interest and maintain accurate reporting for IRS purposes.
- Assist with the liquidation and dissolution process to ensure all assets are returned to the SDIRA.

Important Considerations

Advisory Support: Since clients cannot independently open an LLC for their SDIRA, working closely with an Advisor or Business Representative ensures compliance with IRS rules and regulations from the start.
Full Control but Full Responsibility: The Checkbook Control structure allows clients to directly manage LLC investments, but this comes with significant responsibilities, including proper record-keeping and adherence to IRS regulations.
Not for Every Client: An LLC Interest may not be suitable for every client. Clients must fully understand the responsibilities involved and be diligent in maintaining compliance with IRS rules.

By following the steps outlined in this article and maintaining ongoing compliance with AET’s procedures, clients can effectively use an IRA-owned LLC Interest to diversify their investment portfolio while staying in line with IRS requirements.