Best way to setup an LLC for two Investors and possibly use a SDIRA

19 Replies

I good friend and I have discussed flipping houses before but never created an LLC or invested. He has attended some auctions and saw some interesting properties. We have finally come to a point where we are ready to setup a LLC and get started. I've heard of setting up a Self Directed IRA for real estate investing and think it sounds interesting.

Taking that into info account, I have four questions:

1. What is the best way to setup an LLC?

2. What state is best suited for it? We live in Illinois

3. is it possible to roll over part of an existing IRA into a SDIRA for use a LLC?

4. Is it possible to contribute finds from an SDIRA and Regular funds from my friend/partner who will be the 2nd party in the LLC?

Has any one done this without IRS audits or IRS related problems? I know there are strict IRS guidelines for investing from an SDIRA and i'd like to get the correct info from active investors in the business.

Thanks for your suggestions,

Tony 

@Tony Giangreco

You can use IRA for REI, but if you engage in flipping homes you are likely to be subject to UBIT (Unrelated Business Income Tax) which is currently almost at 40%.

You also can setup an LLC with two partners, your IRA being one of them. The LLC should be setup in the state where you intend conducting business.

An alternative can be for your IRA to simply be the bank and provide funding to your partner, this way there will be no issues with UBIT.

Be sure to consult with a CPA, attorney or other professional experienced in this area. 

Dmitriy Fomichenko, Broker
(949) 228-9393

@Tony Giangreco

Dimitri covered the basics.  

We'd probably not recommend setting up an LLC where your IRA and the investment partners are partners, though you could do that. We'd generally recommend that the IRA have its own stand-alone entity and then lend to or joint venture with the partner. This just creates better isolation and flexibility for your IRA. 5-10 years down the road, your IRA may not be exclusively partnering with this one individual.

Hi Dmitriy, 

When you mention using a IRA as a partner in an LLC, are you referring to a SD-IRA or other type of IRA?

Thanks,

Tony

If we proceed with this, we need to setup the LLC. I've seen multiple sites that allow to fill out all the paperwork and submit it to the appropriate states. Without asking for any website endorsements, can someone provide an expert opinion on the best way to setup an well written LLC while staying on a budget?

@Brian Eastman

I've called a few IRA brokerage houses and banks inquiring about a SDIRA but none of them offer a SDIRA. There are many companies that list this service on their sites, but I don't know who can be trusted. Without braking any forum guidelines, can anyone point me in the right direction of a legitimate company that offers an SDIRA?

@Tony Giangreco - give @Brian Eastman a call. He is helping me set up my SDIRA and was incredibly helpful. It looks like you are already conversing with him, and I just wanted to recommend him.

Depending on the state, it might be a breeze to set up an LLC. In my state you can just file a form with the Sec of State's office, plus a nominal fee, and you're good to go. The SDIRA will likely require an Operating Agreement that puts the owner of the LLC as the manager, and specifies all the things you may NOT do as a SDIRA. There are a dozen or so prohibited transactions, and disqualified persons. Make sure you know both spirit and letter of the law here. And a custodial company can require an attorney to read and sign off on your Operating Agreement. They sure don't want the liability if you mess up here. It's probably a good idea to either have an attorney conversant in this area help you write your Operating Agreement, or use an OA that the custodial company likes. This is not a simple area, but, considering the boon it can be, it is worth it for many RE investors. Good luck!

Originally posted by @Tony Giangreco :

If we proceed with this, we need to setup the LLC. I've seen multiple sites that allow to fill out all the paperwork and submit it to the appropriate states. Without asking for any website endorsements, can someone provide an expert opinion on the best way to setup an well written LLC while staying on a budget?

Tony, you could set up regular LLC using sites such as LegalZoom, but when it comes to LLC owned by your IRA they will be of no help. It has to be 'special purpose' LLC with the specific IRS language used when filing for the LLC with the Secretary of State and the Operating Agreement must be IRS-compliant as well.

Take this seriously, your entire IRA can be at risk if you make a mistake, talk to an expert.

Dmitriy Fomichenko, Broker
(949) 228-9393

Thanks for the suggestions you have all provided. I have a better understanding of what needs to be done.

Tony

You don't need to use Legal Zoom. It is really easy to set up a LLC in Illinois. Unfortunately, IL is the most expensive state to form a LLC in. The state filing fee is $500 compared to say a state like MI which is $50. The form to complete the articles of organization can be downloaded at this website.

http://www.cyberdriveillinois.com/departments/busi...

The link to the form is on this website.  However if you wish to file it online and get it done much faster you can file it online for about $100 more.  The usual turnaround time for the state to file a paper filing is about 4 weeks or so. 

The basic info that the state requires is as follows
1.  Name of the company

2. The name and address of the agent for service of process. Basically the person to serve process if the LLC is to ever be sued.

3. If the LLC is gonna have managers or members. Members in this case is essentially the owner. Managers are third parties that operate the day to day operations of the LLC other than the owners.

4.  Sign and send to the state.  You'll need to send the document with a self address stamped envelope.  You'll also need a cashiers check from the bank. 

Let me know if you have any questions.  I do this for a living.  I can't give legal advice but I can walk you through the process.

Thanks

@Tony Giangreco I see we are practically neighbors. Here are a few things

1. You can use any SDIRA Custodian. I have found solid results from a local SDIRA company called Midland IRA. They based in the loop on LaSalle and Adams. I like being able to see them in person. Review papers in person, see them at local REIA Clubs, etc. Just my personal opinion, but tehre are many companies that do this.

2. I also suggest not making the SDIRA a partner. The paperwork overhead alone is painful to keep this clean.

3. When filing a LLC, yes you can do it yourself, but be sure, with partners, to have a clearly defined Operating Agreement. This should, among many items, contain how to dissolve it, how to remove/buyout a partner/member, how to handle disputes, disagreements, etc. What to do when one partner doesn't meet their obligations (to include time, roles, and of course fiscally), what to do upon the incapacitation or death of a member/partner, etc. How the LLC will handle tax filings, distributions of payments, etc.

Not clearly defining those items tends to be the downfall of most partnerships. Best to lay it all out in advance.

IRA = INDIVIDUAL retirement account. Can't even co-mingle with your spouse. Go ahead and put this in a partnership!

It's perfectly legal to set up a Self-Directed IRA and then instruct your custodian to invest the IRA funds in a partnership, LLC or C-corp along with other investors.  Your IRA account doesn't have multiple partners - the IRA is invested in a partnership with its own share of ownership.

There are certainly some prohibited transactions to be aware of - for example, you can't set up an LLC and fund it with an IRA and then pay yourself or your family members a salary. In the example Tony is proposing, he and his friend could certainly form an LLC, with his IRA owning part and his friend owning another part.  However, Tony  would not be allowed to do any of the work in rehabbing the houses that LLC may purchase.  It has to be strictly an arm's length transaction.  Similarly, that LLC would not be able to purchase any properties that Tony has any personal ownership in.

In fact your IRA and your wife's IRA could invest together in a rental property or LLC.

Originally posted by @Yoochul C. :

Tony

You don't need to use Legal Zoom. It is really easy to set up a LLC in Illinois. Unfortunately, IL is the most expensive state to form a LLC in. The state filing fee is $500 compared to say a state like MI which is $50. The form to complete the articles of organization can be downloaded at this website.


While it is true that filing the articles of organization to register the name of your LLC is easy, that is only one step in the process of creating a legally sound entity that actually functions the way you want it to. I discussed the importance of the operating agreement here and here. A partnership should be treated like a marriage, and a single-member LLC should function as a component of your estate plan.

If you are looking to flip homes using retirement funds, you may want to consider the rollover business startup (ROBS) retirement plan as it is not subject to UBIT.  See following link for more information on this. 

https://www.sba.gov/blogs/can-your-retirement-plan-own-your-business

@Dale Stevens

Hi Dale,

It's good to hear from someone close by. I placed a call to Midland but they had already closed for the day. I'm getting flooded with options and really need to understand them before I can make a decision on which option to select for the IRA/SDIRA and then the LLC for my IRA and the partnership LLC.

There have been many options mentioned in this discussion and I need to investigate them before making any decisions.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.