Question: Neither I nor my IRA custodian is a resident of or is located in Arizona. Can I form an IRA LLC in Arizona that will own and operate a business or own real estate in another state? If so, are there additional costs?
Answer: Yes. An entity (LLC, corporation or limited partnership) formed in one state can register to do business in any other state in the United States. Doing business includes owning real estate in a state other than the state in which the entity was formed. For example, if you are a resident of New York, your custodian is located in Ohio and your IRA LLC will own real estate in California, your IRA could form an Arizona limited liability company and then register it to do business in California. If hired, we will prepare the papers for an additional $200 (plus state filing fees) for each foreign state and file it with any state in which your IRA LLC will own real estate or own and operate a business.
To register an Arizona LLC to do business in California involves preparing and filing a registration form an paying a $70 filing fee. It’s a relatively simple procedure. The problem, however, with doing business in money-starved California is that it has an annual $800 minimum gross receipts tax on LLCs, regardless of where the LLC is formed. An entity formed outside California that does business in California is subject to a $100/day fine for failing to register to do business in the state.
Possible Additional Costs for an Arizona LLC that Does Business in Another State
If your IRA forms an Arizona IRA LLC and then qualifies to do business in another state, the IRA LLC probably will be required by the other state to pay an annual fee and file an annual report. Unlike Arizona, which does not require Arizona LLC’s to file an annual report or pay an annual fee after it is formed, most states do impose an annual fee tax on companies formed in the state and companies formed outside the state that do business in the state. Bottom line is that even if your IRA LLC were to be formed in the state in which it will do business, it would still be subject to the annual fee and report requirements of the state.
Question: My IRA is the sole member of my IRA LLC. Can my IRA LLC loan money to my grandchild?
Answer: Legally yes, but the loan would be a transaction between the IRA LLC and a disqualified person, which is a prohibited transaction under Section 4975(c) of the Internal Revenue Code. A disqualified person includes ascendants (parents and grandparents) and descendants (children, grandchildren, etc.) of the owner of the IRA and spouses of descendants.
Consequences of a Prohibited Transaction
An IRA LLC that engages in a prohibited transaction will cause the IRA to lose its tax-exempt status as of the first day of the tax year in which the prohibited transaction occurs. This means that the IRA is deemed to have distributed to the IRA owner all of the assets in the IRA and the IRA owner must include in income for the year the fair market value of the assets as of the first day of the year unless the IRA is a Roth IRA. If the IRA owner is under 59 1/2, the distribution will also cause a ten percent penalty.
Question: Why do some document preparers and attorneys charge substantially more than the $997 you charge to form an IRA LLC?
Answer: Because they can get away with it. Most attorneys who may routinely form limited liability companies never form an LLC that has an IRA or a retirement plan as a member so they are unlikely to form this type of LLC when asked. Most of the small number of attorneys and document preparers who actually form IRA LLCs charge far too much because they have little, if any competition, and they know that is it very unlikely a prospective client/customer will be able to find somebody else with the knowledge and experience to form an IRA LLC. These types charge far too much because they believe they have a monopoly and can set a high price because clients/customers have no other place to go to form an IRA LLC.
A few years ago I went to a seminar here in Phoenix, Arizona, about how to use self-directed IRA funds to invest in real estate through an IRA LLC. The person who gave the presentation was an attorney not licensed to practice law in Arizona. He told the group the many reasons they should form an IRA LLC, and said he formed them for $4,000. Since I was forming Arizona LLCs (not IRA LLCs) at that time for $599 including all the costs, (which is the same amount I charge today) I was shocked that he not only charged so much, but that people actually paid him that off the charts amount. I asked the speaker how he justified charging that much, but the answer he gave did not justify the price in my mind. That is when I decided I would learn about IRA LLCs so I could form them for my clients at a much lower cost and provide an outstanding total package.
No Specific Language Required by IRS or Tax Law to Form an IRA LLC
If an attorney or document preparer tells you that there are some “magic” provisions that must be in the Articles of Organization or in the Operating Agreement or some special hoops that must be jumped through to form an IRA LLC, that person is not being truthful. LLCs are formed pursuant to state laws, which do not require any special provisions or actions to be taken to form an LLC just because an IRA or a retirement plan will be a member of the LLC. Nor does the Internal Revenue Code of 1986, as amended, require that the Articles of Organization, the Operating Agreement or any other documents used in connection with the formation of an IRA LLC contain any specific language.
Specific Language I Include in the Operating Agreement of an IRA LLC
Even though neither Arizona law nor federal income tax law require that any IRA specific provisions be included in the formation documents of an IRA LLC, I do include IRA and retirement plan provisions in the Operating Agreement I prepare for my IRA LLCs. My Operating Agreement contains selected language from Internal Revenue Code Sections 408 and 4975 (prohibited transactions). Section 408 prohibits an IRA from pledging any of its assets as security for a loan and from investing in collectibles. Section 4975 contains the prohibited transaction rules.
I include these IRA specific provisions in my Operating Agreement because:
- I want the people involved with my IRA LLCs to where to find the prohibited transaction rules and the other restrictions that if violated by the IRA LLC could cause tax penalties and/or disqualification of the IRA.
- I hope the people involved with my IRA LLCs will actually read the provisions.
Why I Charge $997 for an IRA LLC & $597 for a non-IRA LLC
I charge more to prepare an IRA LLC than I charge to form a non-IRA LLC because:
- I do add the Internal Revenue Code Section 408 and 4975 language in the Operating Agreement, which I believe does add value, but not $3,000 of value.
- I get a federal employer ID number for each IRA LLC.
- I am an attorney who does not charge for questions about forming IRA LLCs.
- The entire package I give my IRA LLC clients is worth a lot more than the $997. See “What We Do When Hired to Form Your IRA LLC.”