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Create
Your LLC Operating Agreement Checklist
1. Decide a
name for your LLC
2. Principal Office
3. Registered Agent/Office
4. Initial members
5. Decide the ownership interests of each member
6. Decide the amount of capital each member will contribute.
7. Will any members be granted an interest solely for
the performance of services?
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SELF-DIRECTED
IRA LLC OPERATING AGREEMENT
The
Self Directed IRA Operating Agreement
The LLC Operating Agreement is the core document that is referred
to when issues concerning the LLC need to be resolved. The
LLC Operating Agreement is the most important document for
your LLC. The LLC Operating Agreement reflects the agreement
among the members with respect to the affairs and management
of the LLC essentially governing the relationship among the
members of the LLC.
It is extremely important that you create an Operating Agreement
for your LLC entity. The Operating Agreement helps ensure
that courts will respect your limited personal liability.
This is especially important in a one-person LLC where, without
the formality of an agreement, the LLC will look a lot like
a sole proprietorship, which does not limit your personal
liability for business debts of the LLC. Having a formal written
LLC Operating Agreement will lend credibility to your LLC's
separate existence. Without the formality of an agreement,
the basic operation of the LLC would be governed by state
law, which may not be advantageous to the LLC, it members,
or the business it conducts.
The standard LLC Operating Agreement will not meet the requirements
for your Self Directed IRA LLC. In general, a self directed
IRA LLC Operating Agreement should include special tax provisions
relating to “Investment Retirement Accounts” and
“Prohibited Transactions” pursuant to Internal
Revenue Code Sections 408 and 4975. In addition, since the
LLC will be managed by a manager and not the member, the Operating
Agreement would need to include special management provisions.
It is extremely important to have a properly prepared Operating
Agreement to fit the needs of your LLC and meet the requirements
of the Internal Revenue Service for a Self Directed IRA LLC.
In fact, a copy of the LLC Operating Agreement will be required
by the Custodian and also by the bank where you will have
your LLC's checking account.

What is a Self-Directed IRA?
The term, IRA, is familiar to most people. The Individual
Retirement Account (“IRA”) has become a staple
component of most financial plans.
An IRA is a trust. Under specific statutory language, an IRA
holder contributes an asset (cash) to the trust. The trust
then directs its corpus to a particular investment, typically
stocks, bonds and annuities.
This action of investing implicates a trustee who owes various
duties to the IRA. Typically, a stock broker manages the account's
investment (as a fiduciary) and serves as the IRA's trustee.
The broker exercises virtually all fiduciary power in crafting
the investment.
With a Self-Directed IRA, the IRA holder keeps most of this
power. He or she directs the investment, instead of a broker.
A custodial trustee holds and administers an IRA account.
The investor determines which investment(s) are appropriate
for the IRA, and tells the custodian where to invest the IRA
account.
Taking this a step further, the Internal Revenue Service (“IRS”)
does not put many limits on the types of assets in which an
IRA may invest. While IRAs typically invest in public stocks
or mutual funds, Self-Directed IRAs commonly invest in real
estate, private business entities and commercial paper. The
only investments precluded by the IRS are life insurance,
collectibles and certain “prohibited transactions”
listed under Internal Revenue Code Section 4975.
Advantages of using a Self-Directed IRA
With a Self-Directed IRA, the IRA holder keeps most of this
power. He or she directs the investment, instead of a broker.
Aside from life insurance, collectibles and certain “prohibited
transaction” investments outlined in Internal Revenue
Code Section 4975, a Self-Directed IRAs can invest in most
commonly made investments, including real estate, private
business entities, public stocks, private stocks, and commercial
paper. In the case of a self-directed IRA, the IRA holder
is typically the person that serves as manager of the LLC.
Within that investment, any gains (or losses) accumulate with
all IRA tax advantages. In fact, all traditional IRA rules
apply to Self-Directed IRAs, including contribution limits,
tax deferral or exemption rules, and required minimum distributions.
What are Types of Investments I Cannot Make with a Self-Directed
IRA?
Internal Revenue Code Sections 4975 & 408 prohibit fiduciary
and other disqualified persons from engaging in certain type
of transactions. The definition of a disqualified person (Internal
Revenue Code Section 4975(e)(2)) extends into a variety of
related party scenarios, but generally includes the IRS holder,
any ancestors or lineal descendants of the IRS holder, and
entities in which the IRS holder holds a controlling equity
or management interest.
Under Internal Revenue Code Section 4975, “prohibited
transactions” generally include the following transactions.
1. A transfer of plan income or assets to, or use of them
by or for the benefit of, a disqualified person.
2. Any act of a fiduciary by which he or she deals with plan
income or assets in his or her own interest.
3. The receipt of consideration by a fiduciary for his or
her own account from any party dealing with the plan in a
transaction that involves plan income or assets.
4. Any of the following acts between the plan and a disqualified
person.
a. Selling, exchanging, or leasing property.
b. Lending money or extending credit.
c. Furnishing goods, services, or facilities.
In addition, under Internal Revenue Code Section 408, a Self
Directed IRA shall not be permitted to make (a) investments
in life insurance contracts, (ii) pledge an IRA or any IRA
asset as a security for a loan, or (iii) invest in collectibles.
Common Prohibited Transactions
• Borrowing money from an self-directed IRA
• Using the self-directed IRA as security for a loan
• Selling personal assets to the self-directed IRA
• Buying property in the self-directed IRA for personal
use
• Purchasing property from a disqualified relative i.e.
Spouse, Children, Parents of the self-directed IRA holder.
However, certain transactions are exempt from being treated
as prohibited transactions. For example, a prohibited transaction
does not take place if you are a disqualified person and receive
any benefit to which you are entitled as a plan participant
or beneficiary. However, the benefit must be figured and paid
under the same terms as for all other participants and beneficiaries.
For other transactions that are exempt, see section 4975 and
its regulations.
Disqualified Person(s)
An IRA owner may not invest in property that he/she, a relative,
or his/her business, already owns. Prohibited transactions
are transactions that occur between the self-directed IRA
and disqualified person(s). The following are, generally,
considered disqualified persons.
• The IRA holder
• The IRA holder’s spouse
• The IRA holder’s ancestors and lineal descendants
• Spouses of the IRA holder’s lineal descendants
• Investment managers and advisors
• Anyone providing services to the plan (IRA), e.g.,
the IRA trustee or custodian
• Any corporation, partnership, trust, or estate in
which the IRA holder has a 50% or greater interest
What are the Consequences of a Prohibited Transaction?
If an IRA holder is found to have engaged in a prohibited
transaction under Internal Revenue Code Sections 4975 or 408
with IRA funds, it will result in a “deemed distribution”
of the IRA. The taxes and penalties are severe and are applicable
to all of the IRA’s assets on the first day of the year
in which the prohibited transaction occurred. If this deemed
“distribution” occurs, it will be subject to ordinary
income tax and, if you were under the age of 591/2 at that
time, a ten (10%) percent excise tax on premature distributions
may also be assessed. In addition, if the “prohibited
transaction” is not corrected within the taxable period,
Internal Revenue Code Section 4975(b) imposes a tax equal
to 100 percent of the amount involved.
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LLC Operating Agreements
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