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 you checkbook investment control of the IRA funds. Being 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.
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 use of a special-purpose LLC for investment purposes for many reasons for the plan…including assets 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).
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 LLC with $50,000, leaving $250,000 in the Solo-K plan. 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.
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.
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 (I usually think: all a creditor need to do is verify property tax and utility bill records to help ascertain the owner/member of the LLC).
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! 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.
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.
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:
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. Please consult with your respective professional for independent advice specific to your situation.