I occasionally receive a question from a client on why is an operating agreement for self-directed IRA LLCs important. The genesis of the question usually rotates around when an IRA account owner is establishing the bank account for their IRA LLC, the bank will require that the individual provide the Federal TIN (Taxpayer Identification Number) and the approved articles for the LLC from the state in which it was organized. However, in opening accounts, many banks rarely ask for the operating agreement for self-directed IRAs which, in turn, generates the question. It is almost perceived that if banks are not asking for the operating agreement for self-directed IRA LLCs that it must not be important or necessary.
This belief that it is not important or necessary to have an operating agreement for self-directed IRA LLCs in place for the IRA LLC is incorrect and flawed. While the bank may not require to view the operating agreement to open the account, this document is of vital importance to the IRA LLC and its account manager. Why?
The operating agreement for self-directed IRA LLCs is a living document. An agreement that is vital to the IRA as it outlines HOW the plan is to be operated and the responsibilities of the LLC and its account manager. The language of the operating agreement for self-directed IRA LLCs must include appropriate language related to various sections of the IRS code (e.g., Section 408 and 4975) as it relates to IRAs and Prohibited Transactions governing such plans. Going back to the original question as to why a bank may not require seeing the operating agreement is somewhat akin to the bank just opening account for banking purposes, and having no fiduciary responsibility for the plan or account you are establishing.
Now, since the bank does not have authority or control over your LLC account, you as the account manager must comply with that living document. As such, the agreement must contain additional language about the responsibilities of the management of the LLC held by the IRA LLC account manager. Also, while the bank may not care to review the agreement, all IRA self-directed custodians will require to review and approve any submitted operating agreement for self-directed IRA LLCs. PGI SelfDirected has had its operating agreements reviewed and approved by all IRA custodians we work with. Finally, there are very few, if any, IRA custodians who will even accept an operating agreement for self-directed IRA LLCs from the account manager. While in the past some did, this is now a rare practice.
So, even if the bank does not request the operating agreement to open the IRA LLC account, you need to be intimately familiar with the document and the provisions it contains. Remember, this is YOUR IRA LLC that must adhere to ALL the requirements related to the IRA and Prohibited Transactions compliance. While the TIN and approved articles are important and required as well, it is the operating agreement for self-directed IRA LLCs that is document you must live by in operating your plan.
As always, the information provided is intended to be educational in nature. It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. You must always consult with your respective professional in all such matters.