What is a Limited Liability Company?
A Limited Liability Company (LLC) is a simple form of state-sanctioned business entity. Compared to corporations, LLC’s are easy to setup and maintain, and can be less complex for tax purposes. One of the key benefits of a LLC, is that the entity is distinctly separate from its owners, and therefore shields the owners from liability for the activities of the entity. A self-directed IRA LLC is a special implementation of such an entity.
Owners of an LLC are called members. Most states do not restrict ownership, so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members.
Most states also permit “single-member” LLCs – those having only one owner. This is the case with the IRA-owned LLC structures set up by Safeguard Advisors. The only member is your IRA account.
Management of a LLC may be vested to the members or assigned to one or more managers. A manager may or may not have ownership interest in the LLC. In the case of the IRA-LLC, you will act as the non-owner manager and have authority to conduct the affairs of the LLC.
All states have slightly different regulations and costs related to the set up and maintenance of an LLC, but the fundamentals of operation are basically the same.
Formation of a LLC
The LLC is formed by filing Articles of Organization or similar document with the state in which the LLC is to be operated. The LLC is governed by the laws of that state, and registration with the state allows the LLC to conduct business in the state.
When registering the LLC with the state, a Registered Agent must be designated. This registered agent is the individual or business entity providing the in-state physical address for delivery of court notices or other official service of notice. You can act as the registered agent if the LLC is formed in your own state, or choose to designate a 3rd party if you prefer additional privacy. If the LLC is formed in a state where you are not a resident, you will need to designate a 3rd party in that state.
Which state you choose to register your LLC in will depend upon your investment goals.
The Operating Agreement of the LLC defines each Member or Manager’s rights, powers and entitlements. It is an agreement set by the company members that contains provisions for critical items and rules that run the company.
Standard LLC Operating Agreements are not adequate for the operation of LLC where an IRA account is the member. An IRA LLC Operating Agreement must have special language included that address provisions of Internal Revenue Code sections 408 and 4975.
The LLC will also want to have its own tax ID. The EIN (Employer Identification Number) for the IRA owned LLC will be obtained in a special fashion that communicates to the IRS the fact that the LLC is owned by and under the tax umbrella of a tax-exempt IRA.
Operation and Maintenance
With a single-member LLC, there are no complex requirements for the operation of a LLC such as annual meetings and minutes – though you are welcome and encouraged to keep such records if you like.
The state in which the LLC is registered may have requirements for periodic renewal of the entity, such as an annual or bi-annual report. The process varies by state and some states do not have such a requirement. In states that do require an annual report, there if often an associated fee, which can run from $10 – $500. Most state renewals are in the $25 – $100 per year range.
A handful of states have some kind of business privilege or franchise tax. In the case of an IRA owned LLC, the entity is generally subject to the minimum tax amount only, and would not be taxed on income above the minimum threshold.
Failure to maintain registration or pay state franchise taxes can result in an administrative dissolution of the LLC by the state.
You’re In Control
The main purpose of the IRA-owned LLC format is to put you directly in control of managing your IRA investments. The LLC serves as an asset holding company for the IRA, and you can act as the manager of the LLC. As the LLC manager, you can negotiate and execute contracts, fund the expenses associated with the acquisition and maintenance of LLC investments, and received the income produced by investments into the LLC.