Required: Special Purpose LLCBecause retirement accounts have special rules, you can’t use an LLC that already exists. In fact, it’s prohibited for your Solo 401k plan to invest in an LLC where you’re the member. This is called a prohibited transaction and it has very stiff penalties. Just forming any general purpose LLC may not be compliant with IRS rules either. Instead, you have to have a specially formed LLC that is specifically designed to be owned by your Solo 401k. This Solo 401k LLC is different than your business. Even though your business may also be an LLC, there are far more differences than similarities. Notably, the Solo 401k LLC is made for passive asset holding and investing only. It may not carry on any general business activities. Whenever you’re working with retirement assets, you have to keep passive assets and business activity completely separate.
LLC Member and ManagerWith a Special Purpose LLC, your Solo 401k trust is the member and you are the manager. This allows you to retain Checkbook Control of your retirement funds just like you have with the Solo 401k. The member of the LLC is generally who funds the LLC. In this case, because the member is your Solo 401k, the only money that can come into the Solo 401k LLC is money directly invested from the 401k trust. The Solo 401k LLC will have its own specially designed Operating Agreement. In this document, the responsibilities of the manager (you) are outlined and prohibited transaction details are discussed as well.
Funds FlowAfter 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 than that of a general purpose LLC. Make sure you get help in having experts form your Solo 401k LLC and obtain the tax ID number for the new entity. 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 as most banks are familiar with the LLC structure.
Helpful hint: Your banker and even the branch manager is unlikely to be aware of the structure and strategy of the Special Purpose LLC with your Solo 401k trust. The banker’s job is to open a bank account for your new LLC. Keep things simple and don’t try to explain the Solo 401k LLC. Just open the LLC bank account, get the checkbook, and move onto investing.The Solo 401k then invests funds into the Solo 401k LLC. This can be done by writing a check or sending a wire from the Solo 401k trust bank account to the LLC bank account. Make sure to complete a Solo 401k investment direction form and keep that in your plan records to document the flow of funds from the Solo 401k into the Solo 401k LLC.