A type of legal structure providing the limited liability features of a corporation, and the tax efficiency and flexibility with operations of a partnership. The limited liability company (LLC) can be set up as a single member LLCs or multiple member LLCs.
A limited liability company (LLC) is a corporation where the members of the company are not personally liable for company debt. The advantages of forming an LLC are pass-through taxation, asset protection, limited compliance rules, and less rigid management structures. LLCs have operating agreements that determine company policies, procedures, and priorities. This hybrid form of business combines the protection of a C-Corp with the tax advantages of a partnership. In a single member LLC, there are no separate taxes to file with the IRS since there is just one owner. A multiple member LLC must file a tax return and provide members with a K-1 to file with their returns. There are additional advantages and disadvantages between the two, which are not just a function of the number of parties involved.
Although people typically form LLCs to start their own businesses, investors also use LLCs to invest in real estate, tax liens, cryptocurrency, equipment leasing, and other investments. It is important that investors using their IRA to purchase into an LLC understand all IRS regulations. Investors should review all requirements with their CPA to ensure that the underlying transactions within the LLC comply with IRC code 4975 and are not considered prohibited transactions. Additionally, if purchases into the LLC are invested into an operating company that is a pass-through tax entity, the IRA accountholder may be subject to Unrelated Business Taxable Income (UBTI). If an investment is deemed to generate income that is not substantially related to the tax-exempt purpose of an IRA (i.e., saving for retirement), that income may be taxable in the year it was earned. Without these tax rules, a business operating within a tax-deferred environment, such as an IRA or other tax-exempt entity, would have a competitive advantage over a business that is paying taxes on its business income.
Investors are encouraged to do adequate research or contact a broker/financial advisor, attorney or CPA to determine if LLCs are an appropriate investment. Once you have determined that an LLC is suitable for you, it can be purchased with your Self-Directed IRA or other retirement account at Mainstar Trust. Click here to find out how to use a Mainstar Trust account to invest in an LLC.