Can an IRA Be Owned by an LLC?
Self-directed IRAs can benefit from using an LLC for investing in alternative assets like real estate. The LLC will act as the entity through which rent checks will be sent directly to STC so as to credit your account directly.
Limited Liability
An LLC shields an IRA accountholder from being personally responsible for debts of their business unless a plaintiff can “pierce the corporate veil.” This can help ensure your IRA assets do not become frozen as soon as creditors or judgment-debtors sue for payment.
An LLC is considered a pass-through entity for tax purposes, so earnings do not attract individual income tax and losses flow directly back into member accounts where they can claim deductions on their individual share of losses. An IRA LLC also allows its owner to avoid having to pay custodian transaction fees and annual maintenance fees related to self-directed IRA accounts.
An IRA owned LLC can invest in various alternative assets, including real estate, private businesses, precious metals and tax liens. When selecting investments to include in an IRA owned LLC portfolio it is crucial that legal advice be sought to draft an operating agreement and other documents which ensure you do not engage in prohibited transactions.
Tax Benefits
IRAs hold over $9 Trillion dollars and are one of the world’s most attractive investment vehicles due to the tax benefits it offers.
An LLC can offer significant tax advantages to IRA owners. For instance, it can help to lower tax liability by isolating income and expenses from personal taxes, and reduce administration costs by eliminating the need for a custodian to manage and make decisions on behalf of the IRA owner.
Importantly, an IRA LLC must abide by IRS rules regarding prohibited transactions. An IRA/LLC cannot pay salaries to its IRA owner or spouse and cannot transact with entities controlled or owned by that IRA owner.
To establish an IRA/LLC, it’s essential that articles of organization be filed and an EIN obtained. Furthermore, an operating agreement detailing how your company will abide by IRA regulations must also be drawn up and agreed upon by all members.
Privacy
LLCs allow you to protect both your personal assets and those of the business when sued, so creditors cannot go after your personal belongings for debts or settlements incurred from creditors pursuing lawsuits against your business. A sole proprietorship or general partnership allows creditors to go after personal assets to pay debts or settle disputes that come their way, which could make the difference when faced with lawsuits against it.
To establish an LLC in any state, the articles of organization must be submitted with an associated fee and you must appoint a registered agent who will accept legal notices and tax documents on behalf of your LLC.
CT Tip: An operating agreement should outline how an LLC will be run, in order to help prevent disputes among members. It should include details about ownership breakdown, financial and management rights transfers, profit distribution as well as any necessary penalties.
Consult a lawyer who can advise on the optimal way to manage your SDIRA LLC and keep its tax-advantaged status intact – this includes avoiding prohibited transactions and dealings with disqualified parties.
Flexibility
Utilizing an LLC allows you to diversify your retirement assets. The process works by creating a special purpose LLC owned by your Self-Directed IRA (SDIRA). This provides “checkbook control” and allows the SDIRA to make investments without going through a custodian, eliminating the need for transaction fees.
An LLC is an ideal structure for real estate investments as its flow-through entity status means any income or profits pass directly into an SDIRA tax-free. Furthermore, an LLC allows investors to open business bank accounts more easily, making expense management and financial oversight much simpler.
Care should be taken to avoid infringing upon the IRS’s prohibited transaction rules, for instance when managing funds of an LLC owned by an IRA owner or disqualified individual. Also important are state specific rules; working with a qualified attorney will help ensure you abide by them all.
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