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Drafting An IRA LLC Operating Agreement
Drafting An IRA LLC Operating Agreement
Easy Street vs. The Hard Road!
Which path are you going to take?
After researching the benefits of a self-directed IRA LLC, you’ve decided to form one.
You’ve identified several IRA custodians to partner with. But you’re here now because the custodian wants to review your IRA LLC Operating Agreement, and you haven’t drafted one yet or don’t know where to begin.
You are not alone; having set up thousands of IRA LLCs for clients just like you over the past 19+ years, I caution you that this fork in the road could lead you down two different paths. One clear and well-guided path allows you to take advantage of all the benefits and flexibility your IRA LLC offers.
While one path offers a guided straight-line path to getting your IRA LLC up and running, the other path is filled with a tangled maze of uncertainty, rife with trial and error, and may have you second-guessing the warnings of your financial advisor, who begged you to keep your IRA parked with them in their small corral of investments.
I routinely speak with eager IRA investors who have part of the information needed to create their IRA LLC but only require minimal guidance to move in the right direction.
To assist these individuals, I’ve provided a clear roadmap to help you set up your IRA LLC on your own, including some essential language necessary to incorporate into the IRA LLC operating agreement.
However, after reading through the information, if you prefer to have a team of seasoned professionals with nearly 20 years of experience work with you to create your IRA LLC for you, we are happy to help. This way, you can set up your IRA LLC the right way the first time without the hassle of putting the puzzle pieces together in the right order.
We offer a comprehensive done-for-you IRA LLC service that eliminates all the burden, hassle, trial and error, and guesswork. We will take care of all the details for you.
We’ll set up your IRA LLC, handle all the necessary paperwork from beginning to end so you don’t have to worry about it, eliminate frustration, ensure compliance, and guide your steps so you don’t waste time wandering in the dark. We’ll also provide you with ongoing support and guidance, depending on your chosen package, so you can make the most of your IRA LLC in the days ahead.
Contact us today to get started. We’ll answer any questions as part of a free initial consultation. We look forward to hearing from you soon.
I. Prep Work For Your IRA LLC
A. Choose A Suitable Self Directed IRA Custodian
Choose an IRA custodian, not a trustee, to hold your self-directed IRA. You can also choose a third-party administrator. However, keep this in mind.
TPA stands for “Third-Party Administrator.” A TPA is a company or organization that provides administrative services to businesses or entities, often related to employee benefits, retirement plans, and other administrative functions. A TPA might assist with record-keeping, compliance, reporting, and other administrative tasks. Still, it typically does not hold custody of the funds, which is the role of a qualified custodian.
To maintain the tax-advantaged status of your IRA, it’s essential to have a qualified custodian oversee the assets. TPAs typically do not have the necessary custodial capabilities. Therefore, relying solely on a TPA could jeopardize your IRA’s compliance with IRS regulations.
Ensure that when you select an IRA custodian, they are knowledgeable about the IRA LLC strategy and are comfortable with you using checkbook control.
Note:
Many IRA custodians may be unaware of or support the IRA LLC approach and its legitimacy. IRA custodians who agree to support the IRA LLC may want to take precautions before you begin writing checks from your account.
Ultimately, the custodian you select shouldn’t impact how you manage your IRA LLC because the custodian doesn’t hold your cash or manage your investments. The custodian’s role in the IRA LLC strategy is limited. IRA custodians are passive actors when it comes to your IRA investments. They simply hold your LLC on behalf of your IRA and report annually to the IRS.
Buyer Beware:
B. Choose The Proper State For Your IRA LLC
It’s important to research which state is best for forming your IRA LLC. Some states have specific requirements that must be met, such as residency requirements or filing fees. It’s important to research which state is best for forming your IRA LLC.
Every state is different in terms of filing fees, corporate friendliness, asset protection, rules for compliance, and even taxes (yes, not all IRAs are immune to all taxes), depending on the state in which you file your LLC, so you will want to choose a state that is right for your investment goals.
Remember, your IRA is not meant to “do business” like a traditional LLC outside of investing to grow your retirement.
If you intend to make passive investments in multiple states, choose a low-maintenance, low-cost, and corporate-friendly state. However, if you plan on making only local investments, consider domiciling your IRA LLC in your home state. A registered agent will be required in all 50 states, so using your home state will eliminate the need to hire one.
C. Methods Of Funding Your Self-Directed IRA Vary!
Transferring, rolling over, and making contributions are distinct methods for funding your self directed IRA, each serving a specific purpose.
To illustrate, if you currently have an IRA, it may be advisable to perform a trustee-to-trustee transfer for enhanced security and streamlined reporting. A rollover, on the other hand, is utilized to move funds from a 401k plan into an IRA custodial cash account. Contributions, meanwhile, involve direct payments into the IRA.
When making contributions to the IRA, ensure the contributions are within the IRS annual limits and are qualified for the IRA.
Also, depending on how your IRA LLC is structured, you may be barred from making future contributions beyond your initial contribution, so know the rules and structure your IRA the right way so you don’t get caught off guard because, as we like to say, the best surprise is no surprise.
D. Consider WHY You Need An IRA LLC Operating Agreement
In most cases, the IRS, state, DOL, bank, broker, or any other authority does not require IRA LLC operating agreements. However, there are several reasons why your IRA LLC should include it within your limited liability company’s documents.
It eliminates ambiguity. You’ll want to define roles and purposes, avoid default state rules, limit the liability of members and managers, document capital contributions, assign roles, and execute the agreement so there is evidence that all parties are in agreement.
The primary purpose of an IRA LLC operating agreement is to satisfy your IRA custodian. They will not draft one for you, provide much guidance, and won’t accept a standard LLC operating agreement.
Remember that self-directed IRA custodians are best at covering their a$$, and who can blame them for that?
Managing thousands of clients that are funding an endless array of investment possibilities across the country via checkbook control is a difficult task—and one that is not possible under a cost-effective fee schedule.
Therefore, the IRA custodian must see specific provisions within your operating agreement to meet their compliance requirements. Furthermore, the custodian will require you to sign and agree to hold them harmless for your actions.
Do You Want To Get Your Hands On The In-House Checklist That We Use To Create IRA LLCs For Our Clients?
You can download our IRA checklist for free now!
If you’d like a free copy of the IRA LLC Checklist we use in-house for our clients and a Sample IRA LLC Operating Agreement to review, please fill out the form below on the following page, and we will email these documents directly to your inbox.
II. Drafting Your IRA LLC Operating Agreement
A. Choose The DIY Method Or Hire A Professional
Is it worth investing in professional help to set up your IRA LLC?
The first time I tried painting a room in my house, my goal was to save on the expense of hiring a professional, even though, in hindsight, it would have cost only a few hundred dollars and required no time investment.
After watching countless how-to videos on YouTube and collecting a few hundred dollars’ worth of materials from the local hardware store, I decided to tackle the room painting project on my own. Voilà! A few days later, the room was completely transformed with a fresh coat of paint.
However, there was an issue. The result didn’t turn out as I had originally planned. I came close to achieving the desired color and room transformation, but truthfully, my taping job on the corners wasn’t as advertised.
Despite ruining a perfectly good pair of running shoes and narrowly avoiding several neck-breaking mishaps on a step ladder, I couldn’t help but think about all the money I had saved. At least, that’s the story I told my wife, even though she wasn’t thrilled with my handiwork or attention to detail.
Yes, I saved some money in the short run, but at what cost?
Deciding to set up the IRA LLC yourself means weighing the risk versus the reward of having it done for you. Ultimately, you must decide whether to spend time to save money or invest money to save time.
Just like the room I painted where I fell short of my goal, preparing your IRA LLC operating agreement on your own will likely only cover the essentials, causing you to fall short of your goal, which I will address in greater detail in a minute.
Hiring an attorney or a specialized company experienced in IRA LLCs to draft your operating agreement for you will ensure your agreement is set up the right way the first time and cover the needed details you might otherwise overlook on your own. The good news about working with an experienced firm like ours is that you won’t pay us $300 an hour to learn on your dime like you would an attorney.
B. Naming Your IRA LLC Operating Agreement
Most states call the main LLC governing document an operating agreement, but depending on the state, this may be called a company agreement, company bylaws, etc.
The main LLC governing document outlines each member’s rights and responsibilities, the business’s management structure, and the business’s financial terms. It is important to have an operating agreement in place to protect the members’ interests and ensure that the company is run per state law.
To prepare and draft a legal document that sticks, it should have the right terminology. If you go it alone and don’t know what your agreement should be called, check your state statutes or consult an attorney.
If you don’t want to hassle with the do-it-yourself IRA LLC method or pay an attorney, we’d be delighted to assist you! We can take care of this for you for a nominal fee. Reach out to us now.
C. Make Sure Your IRA LLC Operating Agreement Has The Right Legalese
In this step, you must explain to your IRA custodian how you plan on operating your self-directed IRA LLC to demonstrate that you know the rules for managing one.
Your IRA LLC operating agreement must be drafted the right way, the first time is important because IRA custodians do not take kindly to amateurs or someone trying to wing it just to save a few bucks. After all, you are partnering with them. They are holding your IRA account and signing off on your operating agreement, and they must feel confident in your competence and judgment.
Your custodian does not have the patience or the staff to go through trial-and-error to get your operating agreement up to snuff because it is a conflict of interest and a liability for them to help you write your IRA LLC agreement for you.
Your chances of acceptance are slim if you prepare an IRA LLC operating agreement that sounds good to the layman but does not pass legal scrutiny. It must pass scrutiny, as your custodian’s legal department will read every word of your agreement to ensure it complies.
The harsh reality is that if you don’t draft your IRA LLC operating agreement the right way the first time, your custodian will require you to hire professional help before you resubmit it because they don’t want the liability and the time or patience to go back and forth with you until you get it right.
D. Setting Up Your IRA LLC Operating Agreement
- Start with standard LLC articles typically covered in your LLC state.
- You can obtain a “Plane Jane” operating agreement for your state. You can buy these online, have an attorney draft one, or sometimes even download one online for free.
- Check the operating agreement to see if any provisions violate IRA rules and make the necessary changes.
E. Do-It-Yourself IRA LLC Operating Agreement: Important Technical Provisions
For your added benefit, here are just a few IRA technical provisions to look out for when drafting your IRA LLC operating agreement yourself:
- Make sure to include language regarding internal revenue codes sections 408 and 4975.
- Include language regarding the potential or avoidance of Unrelated Business Taxable Income (UBTI) and, if incurred, that the manager will complete and ensure the timely filing of all relevant tax returns to the IRS and state authorities.
- Include language regarding the additional capital contribution(s) and whether they are allowed or disallowed; if allowed, the agreement should state, “Subsequent investments by the single member are permitted and do not create a prohibited transaction under IRC Section 4975.” (Depending on your chosen custodian, you might need a legal opinion letter.)
- Include language that defines the capacity in which you operate the company, i.e., manager or director, and that you will not violate IRA codes or applicable provisions of ERISA while acting in this capacity.
- The member should be your IRA; this is usually written as “XYZ Custodian CFBO YOUR NAME.”
- Leave a space on the operating agreement for you and your custodian to sign it.
F. Drafting and Establishing Your IRA LLC Operating Agreement
Once you are confident you have a compliant IRA LLC operating agreement document for your IRA LLC and fully understand your responsibilities and what you agree to, you must read it carefully to avoid any issues with your state or, worse yet, the kindlier, friendlier IRS.
Make Sure To Read And Understand Your IRA LLC Agreement!
Send all the necessary documents to your IRA custodian for approval.
G. Draft Governing Documents
Besides drafting the IRA LLC operating agreement, drafting other governing documents depending on the state where your IRA LLC is registered will make sense.
For example, some states require you to keep a registered agent’s consent on file; an organizational meeting stating you don’t need to keep minutes may strengthen the validity of your new entity. Lastly, a banking resolution will be helpful when establishing your IRA LLC bank account.
H. Choose A Suitable Bank And Fund Your IRA LLC Bank Account
Research and select a bank or financial institution that accommodates accounts for an IRA LLC, as not all banks or credit unions offer these specific types of accounts.
Prepare The Necessary Documentation:
Gather the essential documents required by the bank to open the account. This usually includes the LLC formation documents (articles of organization or operating agreement), the LLC’s EIN, and any other specific documentation requested by the bank. Also, have your IRA documentation on hand in case your bank wants to review it.
Once you fund your IRA LLC bank account, you can start making conventional and alternative investments in an IRA that you control.
I. Final Thoughts Before Investing
Now that we have covered the basics and some tips for drafting a do-it-yourself operating agreement for your IRA LLC, here are a few points to consider before making alternative investments with your new entity.
1. Familiarize Yourself With The IRA Rules:
Keeping your IRA LLC in good standing with the IRS requires understanding and following a few rules. By adhering to the rules, it will help you avoid IRA-prohibited transactions.
2. Maintain Detailed Records:
It’s crucial to maintain meticulous records of all your IRA LLC’s transactions. Keep track of your contributions, sources of funds, contracts, and any relevant paperwork related to your IRA LLC, just like you would for any other personal investment outside your IRA.
3. Seek Professional Guidance:
Just because you are now truly self-directed, that does not mean you need to invest alone. After all, investing is a team sport! Seek out professional advice from an experienced IRA LLC specialist, financial advisor, or tax professional well-versed in IRA LLCs.
Need guidance? We can help you navigate away from the landmines and pitfalls that are common to investors. We can help ensure you stay up-to-date on the latest compliance requirements and IRA LLC-specific rules and help you avoid prohibited transactions.