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Solo 401k + Special Purpose LLC

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Have you considered structuring your Solo 401k Trust to own a special purpose Limited Liability Company (LLC) to further protect your assets? If you haven’t looked into the LLC structure, you probably should. LLCs are formed at the state level. Wyoming was the first state to use this business structure in 1977 and once the LLC became recognized by the IRS, all 50 states have now established LLC laws.

For asset protection, the LLC has shown to be particularly favored by real estate owners. Survey data by the Rental Housing Finance Survey from the Census Bureau and Urban Development (2015 is most recent) shows that LLCs continue to increase as a preferred business structure for rental properties. Of particular interest is that when the number of rental units owned increases, the percent of owners using the LLC structure increases significantly.

For instance, the 2015 data shows that 75.5% of owners with a single unit held the title in their names (as individual investors). In contrast, 24.5% held the title as non-individuals (LLC, LLP, or LP). As the number of owned units increases (25 – 49 units), the percentage owned by non-individuals jumps drastically to 53.4%. Interpreting the data indicates that the more sophisticated the investor, the more likely title is held as a non-individual (LLC). This relates to why more Solo 401k investors are using the special purpose LLC.

Why to Use a Special Purpose LLC and a Solo 401k

There are several good financial reasons that we’ll get into about opening an LLC to make investments on behalf of your Solo 401k. However, there is one that isn’t so much financial as it is just plain practical to make conducting business easier. Maybe this has happened to you or maybe not. Sometimes investment confusion happens when the paperwork shows the investor as a 401k. It doesn’t occur often. But, some title companies are more accustomed to seeing the LLC as investor instead of a 401k. It has been known to cause a few extra phone calls and conversations. Probably not the single reason why you would choose an LLC but there are more compelling reasons.

Protect Your Assets

Just as the name implies, a Limited Liability Company limits your liability. Your Solo 401k is a valuable asset. You should do everything you can to protect it from lawsuits and bankruptcy. This is possible because an LLC is recognized as a separate legal entity. Individual members of an LLC are protected from debts, obligations, and liabilities of the company.  However, because your Solo 401k is already well protected from most lawsuits, this isn’t the most important reason for your Solo 401k to own a special purpose LLC. Still, if another layer of asset protection is desirable the LLC is there.

Privacy

By registering your special purpose LLC in the right state, you can make it difficult to identify the owner of the LLC. You will have to assign a registered agent to receive any legal notifications but most states don’t require that the beneficiary or owner of the LLC be identified. That information is typically in the operating agreement, which is a private document not filed with the state.

Don’t Confuse Your Business LLC with Your Solo 401k LLC

Solo 401ks and LLCs are useful business tools and you could have several versions that can potentially become a little confusing. Because of this, you need to pay careful attention to the name you give to each LLC as well as which one you are dealing with at any given time. For instance, your Solo 401k is not the same as your Solo 401k LLC. These are two distinctively separate legal entities and must be treated as such.

You can easily avoid the possibility of confusion by carefully choosing how the accounts are named. For instance, you can name one account “Solo 401k – Joe Smith Trustee”.   Pick something unique to name the Solo 401k LLC such as “For Our Future LLC.”

Why a Special Purpose LLC and Not an Existing LLC?

Retirement accounts follow a different set of IRS rules than a “for-profit” businesses. One of the most important differences in the rules is that your Solo 401k cannot invest in an LLC where you are a member. That specifically means that if you do business as an LLC, your Solo 401k cannot invest in that business. Doing so would be a clear violation of the prohibited transaction regulations.

Specifically, the special purpose LLC is set up for passive asset holding and investing only. This is very important because when you are working with retirement assets, you must keep passive assets completely separate from your business activities. After the LLC is formed, it will need a special tax ID number from the IRS. The process to get an Employer Identification Number (EIN) from the IRS for the Solo 401k LLC is different from that of a general purpose LLC. Make sure you get help by having experts form your Solo 401k LLC form the LLC and obtain the tax ID number for the new entity.

Special Purpose LLC Bank Account

Once the LLC has its tax ID number, you can open a bank account for the Solo 401k LLC. Generally, you can open the bank account anywhere because banks are familiar with the LLC structure. The bank does not necessarily need to be familiar with a Solo 401k. That’s because the IRS compliance rules for your Solo 401k are in the special purpose LLC paperwork.

Nabers Group understands that you want to minimize taxes and maximize earnings. Using a special purpose Solo 401k LLC is a well-established structure for meeting IRS requirements. It also includes the other desirable benefits of an LLC that include tax advantages, liability protection, and privacy. The special purpose Solo 401k LLC enables you to conduct real estate investing quicker and more cost effectively.

Have questions about growing your retirement account? The 401k experts at Nabers Group will help you get your retirement funds into your control, where they belong.

2 Responses

  1. With the Solo401k I understand that an annual tax filing of a 5500-EZ is required for accounts with balances over $250k, would there be an additional tax filing requirement for the special purpose LLC (Solo401k as sole member)? In other words, would the special purpose LLC be required to file an annual tax filing with the IRS and/state even though this LLC is owned by the tax deferred Solo401k account? Similar to how I have to file a 1065 tax filing for a traditional LLC that I already own but is not associated with my solo 401k…

    1. Great question! No additional filing or tax return needed for a special purpose LLC if that LLC is wholly owned by your 401k plan. This is known as a disregarded entity where the member of the single-member LLC would file a tax return. But, when the member is a Solo 401k or IRA (such as with an IRA LLC), there is no additional tax return.

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