On more than one occasion, I’ve heard my friend John Hyre make the statement, “The books tell a story.” Often, the books and records of a business tell an incomplete story because they have not been properly maintained. This can lead to significant problems. Here is my opinion of what should be contained in the books and records of an IRA-owned LLC:
- Articles of Organization which have been filed with the Secretary of State, both the original filing and the approval.
- Direction of Investment Form prepared by the account holder which directs the custodian or administrator to invest funds into that LLC.
- Subscription Agreement (optional) if there is more than one member investing in the LLC.
- Operating Agreement which has been drafted specifically for the LLC to be owned by an IRA. Standard LLC operating agreements will not work.
- Taxpayer identification documentation, including what I refer to as the “575 Letter” issued by the IRS identifying the tax ID number issued for that IRA-owned entity.
- Bank account information which includes the account opening documentation and bank statements.
- Information showing that the custodian or administrator has in their records not only the Direction of Investment Form, but the complete, fully executed Operating Agreement.
- Information indicating who owns the LLC, such as a Schedule of Membership Interests or Certificates of Membership Interest identifying the specific IRAs that own the LLC.
If you are reading this and have an IRA-owned Trust, the list is similar except for the Articles of Organization information. Those would not be appropriate for a Trust. Instead, an IRA-owned Trust would have a Trust Agreement as well as a secondary document sometimes referred to as a Memorandum of Trust which lists the powers, duties and authority of the Trustee. A Memorandum of Trust is able to be recorded on public record should the need arise if the Trust is being used to acquire and hold title to real estate. It may not be necessary if the Trust is only being used to lend on real estate deals.
Whether you have an IRA-owned LLC or an IRA-owned Trust, look at the items listed above to see if you have everything you need to maintain good records. Obviously, the originals need to be kept with the Manager of the LLC or the Trustee of the Trust, but you, the account holder, and your custodian or administrator should have copies of everything in your records.