Some legal issues that are particular to IRAs have to be known and understood by the LLC investor and/or their professional advisors.

An IRA cannot invest in an LLC in which the IRA owner and/or any other “disqualified persons” already own 50% or more of.  Disqualified persons include the IRA owner, the spouse of the IRA owner, the IRA owner’s descendants, ascendants and spouses of descendants.  For example, if you and your wife and kids have an existing LLC in which you are the only owners (e.g., 100% ownership by disqualified persons), then your IRA cannot invest in that LLC.  You could, however, create a new LLC and have both your IRA and the existing LLC invest into it as founding members at the same time.

A notice issued by the IRS in early 2004 called "2004-8", sets out guidelines related to avoiding a penalty associated with a prohibited transaction involving a Roth IRA. However, many attorneys will advise that similar triggering transactions involving traditional IRAs be avoided as well.  Essentially, what 2004-8 says is that any Roth IRA owner that has a “controlling” interest in an entity (e.g., an LLC), has to avoid a transaction between that entity and any disqualified person. In addition, even if the IRA owner doesn’t have a “controlling” interest in the entity, certain transactions, that are not necessarily prohibited, still have to be "listed" (e.g., filed) with the IRS. Failure to do so can result in a penalty of up to $100,000.  For example, let’s assume that you and your Roth IRA each own a part of an entity or that just your Roth owns a part (in both cases, let’s assume the ownership interest is 15%).  If you are the managing member, or if the operating agreement or by-laws of the entity stipulate that you alone can make decisions for the entity (hence “control” the entity), and the entity conducts a transaction between itself and a disqualified person such as your wife, or another entity that you own, you could be considered creating a prohibited transaction (even though you are not violating the letter of the rules of any existing IRA prohibited transaction provision).

A 2004 U.S. Tax Court case contradicted previous case law when it ruled that a prohibited transaction was created when an entity that was owned partially by an IRA made a loan to another entity that was owned (33%) by the IRA owner.  So, you can see that this area of the IRS regulations is changing and current knowledge is necessary if an LLC's transactions involve anyone but third parties in relation to the IRA owner.

The tax attorneys at McLaughlin & Quinn, LLC stay abreast of these changes, and we publish informational material, conduct seminars, send e-mail alerts and newsletters, post to our blog and otherwise educate investors and their professionals so they become knowledgeable of potential violations and stay informed of legal changes affecting IRA transactions. 

In summary, an LLC can be a good way to take control of your IRA investing, but remember, they are not a license to ignore the rules. Be sure to maintain a current knowledge of the rules, and to include a competent attorney or accountant on your team to help you avoid costly violations.