Single Member LLC – Checkbook IRA
What Is a Single Member LLC?
A single member LLC is a limited liability company that is its own legal entity, owned by one member. Despite having only one member, the state requires documentation that describes the operations of the LLC, formation information, and business procedures followed. This documentation can include the Articles of Organization or an Operating Agreement.
How Do Single Member LLCs Work with a Self Directed IRA?
A single member LLC can be used as an investment structure for self directed IRAs. In this case, your IRA forms an LLC and is the only member of that entity. The investor/owner of the self-directed retirement plan is the LLC manager on the Articles of Organization. The manager is responsible for making the LLC’s investment decisions. A bank account must be set up in the name of the LLC. Funds are then moved from the IRA and deposited into the LLC’s bank account. This gives the IRA owner/LLC manager checkbook control of the LLC. The LLC manager can then write checks from the LLC’s bank account to buy investment properties. For this reason, this is often referred to as a checkbook IRA or checkbook control IRA.
These somewhat sophisticated investment structures have tremendous benefits to ease the investing processes. However, these accounts are complex. The plan owner must adhere to the rules of self direction and LLCs. But, many investors believe that the benefits of single member LLCs are worth the extra work.
Want a Simplified Banking Experience?
Midland has a relationship with Cogent Bank, which will simplify the bank account set-up process for your LLC. If you want to set up your bank account elsewhere and on your own, no worries. You can apply and use a bank of your choice. If you’re looking to just set up an LLC and not a new IRA with Midland, you have that option through our Midland Forms service.
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What Advantages Does a Single Member LLC Provide to My Retirement Account?
Single member LLCs give the manager added control over their retirement account funds. It is important to note that the LLC is an asset within the retirement account. Therefore, it should adhere to the IRS rules and guidelines for IRAs. It allows an investor to make quick payments to obtain or maintain an asset. The investor is able to make these payments without requesting funds from their retirement plan’s custodian.
An example of how this investment structure could be useful for an investor would be if the investor is attending a real estate auction and needs to pay for the property if they win the auction. This transaction would not be possible if the investor did not have a single member LLC within their retirement plan. The functionality of having immediate access to LLC funds in this situation is vital to the auction process.
Another example of how checkbook control proves important to a real estate investor is if an emergency expense related to the investment property incurs. As outlined by IRS guidelines, all expenses incurred by an asset owned exclusively by an IRA or other retirement account must be paid by that same account. The same rule applies to single member LLCs. If you own a property in your LLC that incurs an emergency expense, you have checkbook access to your LLC funds. You wouldn’t have direct access to those funds if you held the property in your retirement plan. This is a noted benefit of single member LLCs.
Common Reasons Investors Use a Checkbook LLC for Self Directed IRAs
- To enjoy the protections that typical LLCs offer with a bonus in gaining the freedom to invest. Single member LLCs can invest in alternative assets such as real estate and private lending.
- For quick access to investment funds, allowing timely acquisition of investment properties. Account owners don’t have to go through the IRA administrator to buy and sell property, which can take time. Checkbook control lets investors skip that step and buy assets with funds held in the LLC’s bank account.
- When investing in several properties, the IRA owner avoids multiple asset fee charges from the IRA administrator. Think of the LLC as being the only investment inside the IRA. Regardless of how many assets the LLC acquires, the IRA only recognizes the LLC as an investment when determining asset-based fee charges.
What Should I Consider Before Forming a Single Member LLC?
Single member LLCs are powerful tools. Due to filing requirements and the ability to give an investor quick access to retirement funds, there are some considerations to make before choosing to use a single member LLC to structure your investments.
First, you may want to obtain an attorney or legal counsel in establishing your LLC. Some custodians, such as Midland Trust, offer an in-house LLC set-up service specifically for retirement plans.
Second, because the LLC manager has quick access to retirement plan funds, the LLC manager must be aware of all applicable IRS guidelines concerning prohibited transactions, disqualified parties, and prohibited investment types. If you are unaware of the IRS guidelines for retirement accounts as a manager of a single member LLC, it could be easy to break those rules and guidelines without even knowing. Learn more about prohibited transactions and disqualified parties by reading our Prohibited Transactions Guide. However, if you can navigate the rules and guidelines, the power a single member LLC can provide your retirement plan could be an excellent resource for you.
Single Member LLC Manager Responsibilities
- You are required to keep thorough and detailed records on the LLC’s operations.
- You must know the rules governing self directed investment accounts.
- Educate yourself on how to invest with and maintain your account in compliance with the IRS. If you don’t, you run a risk of incurring penalties and taxation. Your IRA may also lose its tax-sheltered status.
We strongly recommend that you get help from a tax attorney, CPA, or other financial professionals to ensure the LLC is set up correctly and runs in compliance with IRS standards.
Midland clients receive one-on-one attention and service when investing in single member LLCs. We are here to give you the information needed to make an informed decision. We help ensure your account maintains its tax-sheltered benefits to achieve that goal.
Multi-member LLCs work similarly to single member LLCs, but with a few nuances. See more information on multi-member LLCs (closely-held LLCs).