Benefits of a Solo-K LLC
You may not be familiar with the Solo-K LLC! You are most likely familiar with the IRA LLC or IRA Trust, where the utilization of the LLC or Trust permits your checkbook investment control of the IRA funds. Being the manager of the LLC or Trustee of your IRA LLC or IRA Trust, you have the responsibility to comply with all IRS Prohibited Transactions. But, you may not be familiar with Solo-K or the benefits associated with this valuable tool.
What is Being Covered
Think Asset Protection;
What a Solo-K LLC Is/Isn't;
Solo-K LLC Investment Process;
We Did Say Asset Protection;
"Patti" Establishes a Solo-K LLC;
Other Benefits of the Solo-K LLC; and,
Be Cautious with some Promoters
Think Asset Protection!
You do not need to establish an LLC as a vehicle to achieve checkbook control of the plan's assets. Control your Solo-K with a business checking account at a local bank or brokerage firm. But, also, consider the creation and use of a Solo-K LLC for investment purposes for many reasons for the plan...including assets protection.
What a Solo-K LLC Is/Isn't
- Don't get caught up in fancy words or descriptions...your LLC is simply your Solo-K establishing an LLC to make investments on behalf of its owner/member, the Solo-K;
- This LLC is not the Solo-K...rather a tool by which the Solo-K can make investments on behalf, but outside, the Solo-K account;
- Solo-K, and only the Solo-K...your Solo-K is owner of the LLC and serves as its only member;
- Be the Trustee of the Solo-K (usually)...Trustees are Trustees (Solo-K-), Managers are Managers (LLC daily management). Being a Trustee does not make you the owner of the LLC. Only the Solo-K is the owner/member of the LLC;
- Fund Your Plan's LLC as you wish...Capitalize the LLC with all, some or none of the the funds from the Solo-K account;
- Make Investments...from the Solo-K (only), LLC (only) or both. In a common scenario, your decision may be more in part on the potential liability exposure, if any, the investment has (e.g., investments with greater liability risk concerns being made from the LLC);
Consider establishing!...depending on the type of investments being made by the Solo-K, the LLC should at least be considered.
Solo-K LLC Investment Process
- The Solo-K is established with you (or your designee) as Trustee of your plan;
- A special-purpose LLC is established for the Solo-K (where the Solo-K is the sole member) is formed. You want to give careful consideration as to where the LLC is formed. This may be dictated, in part, by where you are making investments, the laws, if any, with your state of residency (for example: if you were in CA, talk to me about the rigidity of the CA LLC regulations per the CA Franchise Tax Board);
- As Trustee, you direct the funding/capitalization of the LLC per your needs and interests;
- As manager of the LLC, you will determine the investment(s) made by the LLC;
- It is imperative that you title the investment made by the Solo-K LLC in the name of the LLC (the entity making the investment);
- Any and all returns from the investment are made payable to the LLC and returned directly to the LLC;
- At your discretion as the Solo-K manager, you can elect to return funds held by the LLC back to the Solo-K plan at any time (remember, the LLC is owned by its member, the Solo-K); and
- Emphasizing again...no one or no entity other than the Solo-K plan can be the owner/member of the LLC.
We Did Say Asset Protection!
At the outset of this post, we identified that the primary reason (but not the only reason) for establishing an LLC for the plan is the asset protection this plan-owned LLC may offer the plan and its Trustee. But, you will see that there can be other benefits to forming the LLC for the plan, and asset protection may be but one of a few benefits.
By its very nature, an LLC offers its member(s) liability protection. In the case of the 401(k) LLC, its member is the Solo-K plan and assets held by that entity. Generally speaking, members of an LLC are not liable for the debts, obligations and liabilities of the LLC.
Is this special-purpose LLC important to consider....yes! But, does that mean you must have an LLC for the Solo-K...no! Does it mean, depending on your investments that, quite bluntly, it may not be the best use of your funds...yes! (example: Solo-K with extremely limited liability exposure...one can argue not having a need for an LLC).
"Patti" Establishes a Solo-K LLC
Let's use an example with Patti, a self-employed real estate agent with no employees. Patti establishes a Solo-K plan and proceeds to rollover $300,000 from a traditional (pre-tax) IRA to initially fund the Solo-K. Further, as Trustee, Patti elects to capitalizes the Solo-K LLC with $50,000, leaving $250,000 in the Solo-K plan itself. To keep things simple and on-point, we are going to make the assumption that no contributions are being made to the plan other than the rollover contributions from the IRA.
Scenario
- $300,000 is rolled over to the Solo-K;
- $50,000 of the $300,000 is capitalized into the Solo-K LLC for a rental real estate investment (e.g., a rental property on some swamp land);
- The remaining $250,000 of plan assets are held in the Solo-K account (not the LLC);
- The LLC has not even received its first rental check when low and behold...
- There is an accident on the property and a lawsuit is filed.
In this example, the only assets subject to creditor action should be the $50,000 which capitalized the LLC. The remaining $250,000 held in the Solo-K plan should be protected from potential creditor attack. Had the plan not established the LLC and, rather, made the investment from the Solo-K plan, the entire Solo-K account balance could be subject to creditor attack.
Other Benefits of the Solo-K LLC
Privacy
Many states do not require an LLC to identify its member(s) when organizing Articles for the LLC. As such, it may be a bit more difficult for a potential creditor to find the owner/member of the LLC. However, practically speaking, this may be a momentary roadblock for the potential creditor vs. an all-out protection device for the plan (think of a creditor verify property tax and utility bill records to help ascertain the owner/member of the LLC).
Practical Matters
Is it simpler for the Solo-K to set up utility, cable (etc.) services for the property utilizing an LLC structure vs. a Solo-K plan? Sure. Imagine calling Cox Cable and telling them your cable bill is in the name of John Doe 401(k) Plan & Trust...you get the visual, they may be like, "what?!"). Do utility and cable companies deal much, much more frequently with an LLC (potentially) vs a Solo-K plan? Without question.
The rental property owned by the Solo-K plan is held either directly (investment made from the Solo-K account) or indirectly (investment made by Solo-K LLC). These billings cannot be put in the name of the plan's Trustee or Manager of the LLC...they must be in the name of the entity which owns the asset.
Financing/Loans
This topic could be its own separate post...so let's keep this brief. Many people are unaware that a Solo-K can borrow or secure lending for a property. Yes, there are very specific IRS rules that must be followed, but it is possible. Do you think it is easier for the Solo-K to secure a loan from a financial institution through the actual plan or an LLC? You got it...probably easier to commence that conversation through the use of the LLC vs. the Solo-K plan.
Be Cautious with some Promoters
There are some promoters who are heavily promoting the use of the Solo-K LLC at a premium professional fee. Any promoter in the self-directed space can charge what they choose to charge in a professional fee; however, why pay an uber-expensive professional fee when you do not have to. Some promoters will "justify" the high professional fee by suggesting/inferring:
- They are the only ones offering this plan option (they aren't);
- The plan is special or new (it isn't...PGI has been offering this option for over a decade);
- They are the only ones structuring it correctly; and,
- With less fanfare, they will attempt to justify why their professional establishment and on-going annual fees are justified being 2-3 times higher than other companies who can assist you.
Related Topics - Benefits of a Solo-K
Reasons Why a Solo-K is Better!
A self-directed IRA is so popular, but the true Star of the Show is the Solo-K. There are many reasons to elect the Solo-K, if you qualify.
Contributions, Contributions & Contributions
Not only can you make maximum contributions that will be more beneficial than any IRA (including a SEP-IRA), you can make Pre-Tax Elective, Roth Elective Deferral, Profit-Sharing, and After-Tax contributions.
1. 2019 Solo-K Contributions
2. Pre-Tax Elective Deferrals
3. Roth Elective Deferrals
4. Profit-Sharing
5. After-Tax Contributions
Loans
As a participant in your own business, PGI's plan documents permit you to take a participant loan, should you choose. Rules to follow? Of course! But, you have the freedom and flexibility to execute a loan from your Solo-K....something you cannot do with any IRA!
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