Jeff Nabers’ Self Directed IRA & Solo 401(k) Blog

****** A note from Jeff Nabers ******

I asked attorney Dan Marsh to shed a bit of light on entity maintenance and its importance. With a general purpose LLC, failing to properly maintain the entity can result in “piercing the veil” which means subjecting creditors to assets of the LLC owner(s). With a special purpose IRA LLC, “piercing the veil” could mean a prohibited transaction resulting in hefty taxes, penalties, and interest.

Entity maintenance is important and it shouldn’t take too much time or money… yet it could save you a lot of time and money in the long run. I suggested Dan keep this post brief, but instead he did what attorneys are supposed to do: he was thorough. Rather than ask him to dumb it down and shorten it, here’s the article in its entirety…

*************

(more…)

LLC stands for limited liability company, and that is the primary purpose for forming such a legal entity. When you enter into a business transaction as an individual (aka sole proprietor), if somebody decides to sue you, all of your personal assets can be subjected to satisfying the law suit. The idea behind an LLC or Corporation is that people are doing business with that entity (the LLC, for example). When a true separation is maintained between the LLC and its members/owners, the LLC can only lose its assets… but not the unrelated assets of its owners.

The cross-liability of one LLC with multiple assets or businesses

Jeremy forms JAH LLC to buy and hold apartment buildings. He buys Apartment Building A as well as Apartment Building B & Apartment Building C.

An accident occurs and somebody gets hurt in the common area of Apartment Building A. This person sues the owner of the buildings, JAH LLC.

Personal assets - Jeremy’s personal assets are protected from exposure to this law suit (except for what he contributed into JAH LLC).

Apartment Building A - All of the assets of JAH LLC can be exposed to satisfying the law suit. This includes bank accounts relating to Apartment Building A and even the real estate itself.

Apartment Building B - All of the assets of JAH LLC can be exposed to satisfying the law suit. This includes bank accounts relating to Apartment Building B and even the real estate itself.

Apartment Building C - All of the assets of JAH LLC can be exposed to satisfying the law suit. This includes bank accounts relating to Apartment Building C and even the real estate itself.

The additional protection of multiple LLCs

Jeremy forms (more…)

Ahhh… the single most mis-answered question in the self directed IRA world:

Customer: I’ve noticed it costs more to setup an IRA LLC than it does a general purpose LLC. What’s so special about the IRA LLC?
LLC Facilitator: The Operating Agreement has special language. Putting together an IRA LLC without this magical language will result in a prohibited transaction and hefty taxes.

This is untrue. While it’s advisable to include special language in a special purpose LLC (one that is intended to be owned by an IRA and managed by the IRA accountholder), the absence of such language will not create a prohibited transaction in itself. Believe it or not…

Any newly created LLC can be used with an IRA!

…without necessarily creating a prohibited transaction. The sales pitch that you need the special purpose operating agreement is bogus.

That said, it is still advisable to have an IRA LLC established for you by a company experienced and competent in such facilitation. Not because you have to, but because you should want to. Why?

You want things to look good in the event of an IRS audit

This is probably the main reason why you should have an IRA LLC formed for you by a specialist instead of doing it yourself. If you get audited, the IRS is going to have a first impression about your IRA LLC structure. If it looks like you did everything compliantly and your documents pro-actively address most compliance issues, the IRS’s first impression may be friendly. If it looks like you just threw the LLC together with little regard for compliance, this may negatively affect the IRS decision of how long and excruciating the whole ordeal will turn out to be. This is an important issue. Notice I said “looks like”. Regardless of how compliant you are, (more…)

A question I get all the time is “Can I personally mow the lawn, maintain, and/or repair properties owned by my IRA LLC?” My answer is “No” which usually creates the response “But another company said I could.”

First, let’s summarize that the accountholder/participant of a retirement plan generally can’t have a transaction between themselves and their retirement plan. This includes the furnishing of services, sale of property, lending of money, and extension of credit between a plan and disqualified person (such as the accountholder). Next, let’s establish that active landlording means mowing the lawn, repairing, and fixing up properties, while passive landlording means collecting rent, paying mortgages/taxes/insurance, and contracting out the more active tasks to non-disqualified-persons. So is active landlording allowed? No, and I’ll provide two answers - the technical and the layman’s.

The Technical Answer

The argument for why active landlording for your IRA LLC’s property is not a prohibited transaction goes something like this…

As a general rule, the Internal Revenue Code provides (more…)

For many small businesses forming an LLC in your home state is the simplest and most convenient option. An LLC that does business in a state other than where it was initially registered must register as a “foreign LLC” (foreign meaning from a different state, not a different country) with the state in which it conducts business.

When an LLC is registered with a state, a registered agent must be named. This is the person or corporation designated to accept official documents on behalf of the LLC. This person or corporation must reside in the state of formation. If you are registering an LLC in a state in which you don’t reside, you’ll need to choose a person or corporation residing in that state to serve as your registered agent. There are many companies who provide a registered agent service for a nominal fee.

There are advantages to choosing certain states in which to initially register your LLC. Many large corporations choose to form an LLC in Delaware because (more…)

I ran across something today that may surprise you. I was reminded of why I founded the IRA Association of America. I hear some of the craziest things from prospects and new customers, such as

“My understanding is that my IRA can loan money to a Corporation I own part of.”

“I’ve heard that my company can do business with my IRA if things are structured right.”

First of all, these statements are both incorrect, and would each result in a prohibited transaction, triggering hefty tax penalties. Now, when I hear these type of statements I wonder where they come from. I’ve always figured that they must originate from various new, inexperienced companies with educational materials that are simply inaccurate. Today, I found out that I’m half correct. It is coming from inaccurate materials and sources, but to my surprise, these sources aren’t always new and inexperienced.

This post is in reference to an LLC facilitator called CHECKBOOK IRA located at www.checkbookira.net and www.checkbookira.com. These guys may be familiar to you because, at the time of this writing and for the past several years, these web sites come up in search engine results for terms like “ira llc” and “self directed ira”. Now, I’ve never met or spoken with the owner, Steve Sheperd, so I can only comment based on the information on his web sites.

Currently, if you go to CHECKBOOKIRA.net and click “legal rulings” it links to a ruling that says “Your IRA can make a loan to a company owned less than 50% by the IRA owner.” This caught my attention because the claim was contrary to the understanding given to me from seasoned Department of Labor agents. So I clicked the link and read the entire document. (It’s important to note that (more…)