Creating An LLC 100% Owned By My IRA
This is a follow up to my “Self Directed IRAs and Double Taxation” thread in the “Tax/Tax Strategies” forum. Thanks to everyone for their replies.
I have contacted two vendors who offer (for a substantial fee) to create an LLC that will be 100% owned by my IRA. I would be the manager of the LLC (without compensation) and I would have total control of all transactions. The beauty of this arrangement is that I will not have a third party (the Self Directed IRA Custodian) in the middle of each and every transaction slowing down my investing activity. This sounds like a great arrangement since I get the liability protection of an LLC and I get direct control of my investing activity. However, I have a problem with the very substantial fee that these vendors charge (about $4k each as of this writing). Reading through the sales literature one is led to believe that there is a very specific process that must be followed when creating the LLC lest the whole arrangement fail to meet IRS guidelines. If this is so then a higher than normal fee is justified but I am not sure that $4K is the number. Now, to be fair, this fee does cover opening a self directed account (which I already have), transferring IRA funds to the new account (which I have completed) creating and setting up the LLC, opening a bank account for the LLC (which I can do).
Does anyone have experience in creating an LLC as outlined above. If so, is there a magic formula that must be followed or are these vendors overstating the situation a little? I would very much like to do this myself, with the help of a business attorney if necessary (assuming I could find one who has the specific knowledge in this area).
Very normal for one's SDIRA to buy all or some of the shares of an LLC, which was in turn formed just so it could do deals and details of management, without everything having to go to the IRA custodian for their perusal and signature.
As far as the cost quoted you for the formation of new LLC, shop around your legal community. It's not legal equivalent of "brain surgery".
Sounds like it might work. THere are regulations regarding partnering in an LLC and directing the LLC.
[addsig]
Thanks guys.
JohnMerchant - Just so that we are clear, the vendors I have spoken with have lead me to believe that no ordinary set up of an LLC will suffice, hence my statement, "one is led to believe that there is a very specific process that must be followed when creating the LLC lest the whole arrangement fail to meet IRS guidelines". But if I read your response correctly you suggest that there is no mystery that someone in my local legal community cannot figure out. Is this a fair assessment? "Brain surgery" is not required?
Bgrossnickle - Thanks for the reference. I will communicate with you shortly. Regarding partnering, I think that is OK so long as I and my IRA own less than 50% of the LLC (prohibited party rule), but I will check on that further.
Right...and there aren't just a whole lot of ways to mess up an LLC's ownership of property, or its ownership by your SDIRA.
I've gotta think you're maybe being hustled into thinking there's some kind of magic LLC that they could do for you...and that's buggy-wash.
Lots of IRA money used in RE partnerships, where the IRA partner is the cash partner, and the other guys sign the note on the loan.[ Edited by JohnMerchant on Date 06/27/2004 ]
To elaborate a bit. You can partner but you can not benefit. Meaning that you should have predefined percentage of partnerships from the get go. You can not have the IRA put up all the money and then later you will pay it back from the profits. If you are 50-50, then you need to come up with your 50% from the beginning.
Brenda
"I think that is OK so long as I and my IRA own less than 50% of the LLC (prohibited party rule), but I will check on that further."
I think it would be the opposite of this.
The IRA own a majority, you personally own the minority. The other way you personally are benefiting from the IRA's funds.
But It's issues like these that seem to be ill defined.
I don't know if there is any special language required within the Operating Agreement and Articles of Formation for the LLC that is 100% owned by your IRA. I have not had time to research to see if there are any IRS Rulings regarding this type of structure.
.[ Edited by JohnMerchant on Date 06/26/2004 ]
wexeter
Thanks. I have since had the opportunity to talk to a third so called "expert" company in this field. I pumped them as much as I could about the specifics required in the operating agreement, those "tricky IRS requirements". I came away with the impression that the agreement needs to state in sufficient words that the purpose of the LLC is to make investments in line with the IRS rules that pertain to SDIRAs and specifically that prohibited transactions are not allowed. Further the manager (me) conducts the affairs of the LLC without compensation.
The only other thing I gleaned was that there are opinion letters from the IRS that state that such an arrangement is acceptable to the IRS. Clearly getting a hold of one of these opinion statements would be very helpful.
I'm definately not going to spend the very big bucks getting a turnkey LLC for my SDIRA - those $4K deals. I just need a couple of hours from an attorney who has set one of these up before - enough to generate the magic words for the operating agreement. That and a DIY package that you suggest should do.
I'm getting closer to the next step.[ Edited by gprint on Date 06/26/2004 ]
Good plan! See what a little education is really worth? Saved you several thousand bucks.
2 thinks..
wrt to IRS letter, do you remember any specifics of it the name of the party(s)?
How does a DIY kit help, if the funds have to be held in trust at custodian?
JonMerchant
You're absolutely right. Thanks for your input.
cjmazur
I have no specifics on the IRS opinion letter but will post same here when I find out something. Also, when I refer to DIY I just mean setting up the LLC. Once I have the LLC set up I will instruct my custodian to buy the 100% interest. The funds end up in the LLC and I will control them in line with the same SDIRA rules the custodian would follow.[ Edited by gprint on Date 06/27/2004 ]
cjmazur
Follow up - The custodian holds the LLC in trust.
right.
This I get when the LLC is 100% owned.
I don't know if it was this thread or not but people were talking 60 personal 40 IRA.
Just wanted to throw in my $.02 worth. I was doing some research on this topic as well.
I believe the IRS publications state that "receiving unreasonable compensation for managing" the SDIRA-owned property is a prohibited transaction. However, I still have not found a clear defininition of the term "unreasonable".
I take that to mean that I actually COULD receive monetary payment for the work I do and that it would NOT constitute
"benefit" in the strictest sense of the word. I seem to remember the figure $2,000 - $2,500 bounced around in one conversation that I had last year, but I can't find a documented reference to that effect.
Any thoughts on this, anyone?
glieberman
From what I have been told even taking payment for personal gas and telephone expenses is a no-no. However, I have often thought that taking nothing at all is in effect an additional tax free contribution to the IRA which seems completely at odds with the IRS rules that limit annual contributions. So, in effect, I think your point has merit and may well hold water.
Something else I need to check on closely.
In revisiting this legal topic, I came across a really interesting recent USDOL Ruling, that is binding legally on IRS on ERISA related issues...such as who, how, etc., on IRAs.
To read this decision, stating that in effect, a FLP (familty ltd p'ship) can have family members and IRA members, and it's NOT illegal and family members are not unqualified members, despite the family connection prohibition...because IRA in this case (Fetner decision) is but one of several Ltd. partners, as are other family members, and all of Ltd partners are actually dealing with the FLP as its own legal entity...and they aren't dealing directly with each other!
Here's the DOL ruling itself.
Enjoy.
www.dol/gov/ebsa/regs/AOs?ao2000-10a.html
John Merchant
Gprint,
this is reason I'm here on this site. I too have talked to the 2 truly self directed companies and have been told the same thing, really tricky to set up the LLC. And I was also quoted about 4k. I want to be able to buy land and build houses myself. With no profit going to me, the builder. Just the proceeds after the sale going to the LLC( which of course belongs to the IRA). Since I would need to write checks for materials and such, a LLC is the only way I see around this. Someone correct me if I'm wrong. If you find out any more info on a reasonable set up, please let me know.
[addsig]
echo
As I understand the LLC arrangement so long as the IRA owner adopts and can demonstrate an investor approach all is OK. The important thing is not to be seen to be in the trenches doing the work.
One particular thing I see with your arrangement is that the IRS may argue that you are running a business as oppossed to operating an investment vehicle and may require the LLC to pay UBIT taxes. You might read my other thread on that topic.
As for the magic words in the Operating Agreement, I believe it needs a knowledgeable attorney to put something together. I bet there is someone out there who already has such a document on his/her word processor. It's just finding out who to contact.
I'm working on other things at the moment but will get one of these LLC's together sometime soon. When I do I will post the results here.
Since you are buying cash, set up the LLC first then buy the rental property in its name.