LLC company in a self-directed IRA

[smurff]

I've been trying to learn the ins and outs of forming a company using a LLC inside a self-directed IRA,  and letting the business be run from within the IRA.

Has anyone here actually tried this, or has any insight into whether it is even permissible?

Looking around the web, there are many law firms willing to get you established if you have an approved custodian, but there are others who claim such companies aren't allowed (or will soon be disallowed by the IRS and the Dept of Labor), primarily because they are a form of self-dealing and any tax deferral benefit might be wiped out by the LLC IRA having to pay unrelated business income taxes.

[MediumTex]

Be careful.

This kind of thing is within my practice area and I wouldn't touch a transaction like that with a 10 foot pole.

It's not that it's illegal.  There are just so many things that can go wrong that it's almost never worth the trouble IMHO.

I've sat through four hour sessions on how to structure these things and I still had questions when it was over about the way it was supposed to actually work.

Structures like this are also a huge audit target for the IRS because the IRS knows that most people aren't doing them properly and thus it's a target rich audit environment.

In other words, even if you are doing it correctly you still have a high audit risk.

[smurff]

Thanks for the info and the warning, MediumTex.  My first discussions with my custodian led me to believe this was a simple thing to do, and searching online led to lots of lawyers offering assistance with setting them up, while simultaneously indicating such LLCs inside IRAs were controversial.  One lawyer said such IRA LLCs were impossible, yet he had a product to do it.

Is there ANY legit, uncontroversial way to have a business inside an IRA?

[Pointedstick]

My uncle does this. He tried to explain it to me once. I consider myself a pretty knowledgeable guy about finance and tax law but for the life of me I could not understand how in the heck it was supposed to work. What I took home from the conversation was that while it might be technically possible, the required recordkeeping and regulatory tiptoeing made it something that your average mortal should really not be touching.

[smurff]

I'm an average, chap-wearing mortal.

[D1984]

I am not sure why someone would want an active trade or business as an LLC owned by an IRA anyway. LLCs are passthroughs and if the LLC is engaged in a trade or business then any income over  a certain (very low...like a thousand dollars) threshold will be UBTI to the IRA and the UBTI tax brackets are far more compressed than the regular ones (i.e. one be in the top bracket for only 12 or 13K of income if IIRC under the UBTI rules for trusts, nonprofits, and IRAs). This is completely aside from any issues with self-sealing or the like.

Would an IRA that owned an LLC and used the LLC only for investment purposes (i.e. stocks, bonds, rental real estate, US gold bullion coins, etc) and not for a trade or business be any safer tax wise? There wouldn't be any UBTI issues since it's not income from the ordinary course of a trade or business; would the worry still be that since you had checkbook control they could say the LLC was your legal alte ego and that you were thus "sealf dealing" and disqualify the IRA? What if someone else had official (on paper) control of the checkbook (i.e. you weren't actually the one signing the checks...say you made a trusted friend the LLC's CEO or controller).

[MachineGhost]

The only advantage I see in having an IRA own a domestic LLC is for real estate investment purposes, or own a foreign LLC to access offshore investments.  Other than that, the arrangement seems conceptually no different than using a third-party [offshore] trustee to manage a trust, foundation or IBC/LLC per your wishes.  Checkbook control should stay with the trustee but I'm aware many of the IRA custodians give you that access directly to avoid bureaucratic hassles.  That seems like a big red flag since you still have effective control.  Even though it used be about giving up title but retaining control, the heyday of form over substance is pretty much over if you get audited or caught.  The emphasis is now on who the ultimate beneficiary is.