An Operating Agreement for Your Self Directed IRA LLC With Checkbook Control

My salutes to Depreist for this– I had to make a few slight changes to this due to the requirements of my IRA custodian. You also don’t have to put the number of shares. Again from the original site:

A standard LLC Operating Agreement will not meet the requirements for your Self-Directed IRA LLC. In general, a self directed IRA LLC Operating Agreement should include special tax provisions relating to “Investment Retirement Accounts” and “Prohibited Transactions” pursuant to Internal Revenue Code Sections 408 and 4975. In addition, since the LLC must be managed by a manager and not the member, the Operating Agreement would need to include special management provisions.

Some important things to remember:

1. You are the IRA owner.

2. Your IRA will own 100% of the LLC.

3. You do NOT own the LLC.

These things may seem self evident, but it is easy to get confused about these issues and confusion leads to mistakes. The entire tax benefit depends upon these facts.

Now, please remember the following is my opinion and you know what they say about opinions.

For single member LLCs, the Operating Agreement is of little practical use. I mean it is only an agreement with yourself, which means you can change it at any time for any reason or no reason. In fact, in the state of Texas, where I live, you are not even required by the state to have an Operating Agreement. The bottom line is: “It is not what you say, but rather what you do, that is important.”

For example: You could include a line item in your Operating Agreement that states you will not engage in any prohibited transactions. If later, you are found to have dealings with a disqualified individual, you will still be in trouble, regardless of what you wrote in the Operating Agreement. In fact, it may even go worse for you because the Operating Agreement will demonstrate that you were aware of the infraction beforehand.

Why do you need an LLC Operating Agreement?

My experience in the case of a single member LLC is you need the Operating Agreement for 2 reasons.

1. Your bank will require you to provide them with a copy when you set up your LLC business bank account.

2. Your custodian will require you to provide them a copy when they set up your Self Directed IRA Account.

Rules specific to a Self Directed IRA

The primary way that an Operating Agreement for a Self Directed IRA LLC with Checkbook control differs from a standard LLC Operating Agreement is how the IRS rules for Self Directed IRAs are handled. As I have said earlier, If you don’t follow the rules for self-directed IRAs, you can risk the tax-deferred status of your account. This could lead to the disqualification of the IRA and result in severe tax consequences.

Here is what you need to know:

At a minimum, your Operating Agreement must contain language to handle the following:

Prohibited Transactions and Investments: This is basically self dealing and certain investments such as collectables.

Disqualified Individuals: Your IRA may not buy an investment from or sell an investment to a “disqualified person.”

Indirect Benefits: The purpose of the IRA is to provide for your retirement in the future. It is considered to be an “indirect benefit” if your IRA is engaged in transactions that, in some way, can benefit you personally today.

UBIT: This is a tax that occurs when leverage is used to develop profits in investments.

Here are some additional rules that apply because we are forming an LLC for the purpose of checkbook control of our IRA funds.

IRA LLC Rules

The same IRA prohibited transaction rules that apply to an IRA apply to an IRA LLC.
An IRA may be a member of an LLC through the purchase of LLC units.
When an IRA is the sole member of an LLC, the LLC is deemed a single member LLC and thus classified as a disregarded entity. As such, an LLC where the single-member is an IRA, the LLC does not file a Federal business-tax return.
IRA can own a 100% of a newly formed LLC. Important: It is imperative that the LLC is newly registered and units issued for the first time. If not, the transaction may be deemed a prohibited transaction.
The manager of the IRA LLC may not be compensated if the manager is the IRA owner or a disqualified party (e.g., the IRA owner’s spouse, kids, parents, etc).
IRA LLC investments must be titled in the name of the LLC not your name or in the name of the IRA.
IRA LLC bank account may not to be co-mingled with your personal funds.
Investment gains and expenses must flow through the IRA LLC bank account. Therefore, if the LLC invested in a fixer-upper, you may not pay for such repair expenses with personal funds but rather use IRA LLC funds.
IRA owner is prohibited from personally guaranteeing debt on behalf of the IRA LLC. When an LLC obtains a non-recourse loan from a third-party, usually for investing in real estate, the LLC must secure the loan and thus LLC funds must be used to make the loan payments. I don’t use leverage like this because I just don’t want to fool with the UBIT rules.
Annual IRA contributions and IRA/401k transfers must flow to the self-directed IRA not the IRA LLC.
Those are the basics of what I have learned about making an Operating Agreement for an IRA LLC with Checkbook control. And… just to make it interesting, I have included a copy of the Operating Agreement that I currently use for my own LLC.

 

An Operating Agreement

 

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