What are the advantages and regulations for a multi-member LLC? Can I invest with my spouse?

Created July 20, 2021 15:52

There are many advantages of a Multi-Member LLC and an asset can be owned by multiple Self-Directed IRA in Rocket Dollar accounts. Example scenarios and prohibited transactions are in further detail below.

What are the advantages of a multi-member LLC?

This structure allows multiple IRAs, even those that are connected to prohibited people, to invest in the same asset.
You can pool investment capital so that you can invest in larger, more lucrative assets.
Spouses can equally participate in an asset instead of favoring one of the spouse's accounts.

What are the disadvantages of a multi-member LLC?

This structure is more complicated and could get challenging to set up. It might require an experienced lawyer if you are doing more than a basic multi-member LLC or are not confident you can set it up yourself.
Usually, all investments must be equal and fairly allocated if you are investing with a prohibited person (spouse, children, grandparents). When contributing, each person must invest the same amount at the same time if they are investing with prohibited persons and receive the same ownership share. Investment distributions must be made at the same ownership levels. You should be comfortable with everyone receiving similar equity per dollar invested if they are a prohibited person, and investment timelines. Sometimes a generation gap or difference in investable dollars can make this strategy harder.
Each multi-member LLC must file a federal partnership tax return.

Example Scenarios

How does this work at Rocket Dollar?

At Rocket Dollar, all customers receive a Colorado LLC, regardless of where they live. Think of this as the "umbrella LLC" that will cover all investments your IRA will make.

For a husband and wife, they would both open Rocket Dollar Self-Directed Traditional IRAs. Rocket Dollar will open their IRAs, Colorado LLCs, and LLC Bank Accounts.

Both the husband and wife roll over $200,000 to their Rocket Dollar accounts. Those dollars come through the titled Colorado LLC and move to their LLC bank accounts at Rocket Dollar's preferred bank partner.

Then, the husband and wife open an LLC in Texas, their home state. This "Lone Star Rentals LLC" is going to eventually purchase the targeted rental property. However, the LLC has no funds of any kind. It must be funded entirely by their IRAs and not commingled with any personal dollars of the family to avoid a prohibited transaction.

The husband and wife both execute a $200,000 wire to the Lone Star Rentals LLC at the same time. Husband Smith RD LLC and Wife Smith RD LLC (the two Colorado IRA LLCs Rocket Dollar made) become 50% owners of Lone Star Rentals LLC. The IRA LLCs are listed as the two owners of the LLC, NOT the individuals.

It's important to remember, that any business downstream of your IRA LLC is titled and executed by your IRA LLC! You are the managing member of your LLC, but you have to keep a separation between decision-making that benefits you vs. your IRA.

Lone Star LLC now has $400,000 in assets to deploy for business purposes. Their IRAs now become the two equal managing members of Lone Star Rentals LLC, the husband and wife vote to purchase their first rental property for $350,000 and leave $50,000 for contractor upgrades and hiring of a property manager.

Funding

If a husband and wife want to invest in the same rental property, the husband puts in $200,000 in retirement funds and the wife puts in $200,000 as well. If the wife has more retirement funds from old jobs to roll over, she could not put in $250,000. The husband will have to wait until he has $50,000 more in retirement funds to roll over.

Meanwhile, the wife can still make a side investment completely unrelated to Lone Star Rentals with her "umbrella" IRA Colorado LLC, by investing $50,000 in bank CDs and bonds, which she will cash out and redirect to Lone Star Rentals when her husband catches up.

Then, the husband can roll over $50,000 into his IRA, the wife sells the bonds, and collectively contribute $100,000 to the $400,000 they already have. If the wife just transferred her IRA dollars early, technically she would either have to become a higher % owner or would not be receiving equal treatment under the LLC per dollar invested.

Funding and Prohibited Transactions

Fair Allocation if you invest with a prohibited person...

A husband is impatient to get going and funds 60% of an LLC so they can meet the $400,000 minimum needed to buy a great rental property. The wife only contributes 40% of the total value.

This would be a prohibited transaction because the investment of the downstream LLC is not fairly allocated and the husband is executing more control and dealings over an investment with a prohibited person. All investments with a prohibited person must be equally and fairly distributed.

For example, fair allocation of an LLC owned by IRAs that might deal with a prohibited person.

50%/50%
33.33%/33.33%/33.33%
25%/25%/25%/25%
20%/20%/20%/20%/20%

You can also visit our general prohibited transaction questionnaire.

Fair Allocation If you are not dealing with a prohibited person...

You allocate fairly by the money contributed.

LLC Member 1: $70,000 contribution, 70% Ownership

LLC Member 2: $30,000 contribution 30% Ownership

LLC Member 1 cannot give themselves 5% more ownership for "running the deal" or "finding the deal." Even if one member is more involved, you must fairly allocate ownership according to dollar amounts. Giving yourself more ownership would be akin to self-dealing, or paying yourself to manage a property or investment. This is a prohibited transaction.

How do investments and dividends get distributed?

Income and dividends distributed from the Investment/Deal LLC must be returned in line with the ownership of the different members. If a father invested 25% and his three sons each invested 25% into a Deal LLC, the father cannot take any extra or early distributions before the sons. All distributions must be conducted at the same time and divided equally into 25% shares.

Is there a difference for the Solo 401(k) funding an LLC?

Even if trusts are funding a Deal LLC instead of IRA LLCs, you should operate under similar rules, allocations, and be careful not to commit a prohibited transaction. ERISA and DOL have issued similar enforcement for Self-Directed Solo 401(k)s and IRAs.

Can Rocket Dollar set up the downstream multi-member LLC for me?

No. Your "umbrella LLC" in Colorado and its upkeep compliance is included with your sign-up fee. Any additional LLCs will have to be handled by the customer.

Can Rocket Dollar help me execute this strategy?

No. We can give general education, but once you start making investments, you must execute those on your own. This is an advanced strategy that should only be executed by those who will be diligent in the setup, accounting, and reporting of assets.

If you wish to get in touch with a lawyer experienced in working with these structures, you may contact Rocket Dollar, and we can refer one to you. 1-855-762-5383.