If you ask a typical brokerage to invest your IRA in a private company, they may turn you away or charge you an exorbitant fee to invest. However, with a Self-Directed IRA you have the power to invest in almost any alternative asset you desire, even those that are not publicly traded.
Investing in a private business or LLC is perfect for both the private business owner and investor. The business owner gains access to capital, while the investor has the opportunity to reap a high return on the investment in a tax-advantaged account. By investing with your retirement funds, you are also gaining the benefit of diversifying your retirement portfolio.
A private business - also known as a private placement, private stock, and private equity – is an entity that a Self-Directed IRA account holder can invest in that is not sold on the public stock market.
An LLC (Limited Liability Company) is a type of legal entity that is used to own, operate, and protect a business. A benefit of an LLC is its limited liability factor. With an LLC, only the LLC assets are used to pay off business debts. This way, LLC owners can only lose the money that they have invested in the LLC, not any personal funds or items.
Also, according to the IRS, an LLC is described as a pass-through entity. In this case, the business income passes through the business to the LLC members, who report their share of profits or losses on their own individual income tax returns.
Private Businesses and LLCs can pool together money from numerous investors, who acquire stakes in the company.
There are a wide variety of private businesses and LLCs that you can invest in with your Self-Directed IRA. Here are a few examples:
As a Self-Directed IRA investor, you are responsible to conduct due diligence. Here are a few things to consider before you make your investment.
Review the Investment Documents
Review documents such as the operating agreement, purchase agreement, etc. With a CPA or financial advisor. It is important to understand legally what your IRA is entering and what you are entitled to as a shareholder/member. For example, do you have voting rights?
Understand Prohibited Transactions
Ensure that you are not investing in a company that is owned over 50% by you or a disqualified person, which results in a prohibited transaction.
Titling of Documents
To properly invest through your IRA, ensure that all documents such as subscription documents, stock certificates, company records, etc. States your IRA as owner. To do this, it would be titled as “Madison Trust Company FBO (your name) (your account number) IRA. In order to receive the benefits of investing through your IRA, make sure that your investment is not held in your personal name.
To invest in certain securities that are not registered with the SEC, you must be an accredited investor. This is because these types of investments tend to be riskier but can offer higher returns for those who can afford to take the risk. An accredited investor is someone who meets one of the following guidelines:
The individual net worth is over $1 million (excluding the value of the primary residence of the person)
The individual has income over $200,000 in each of the two most recent years (or joint income with a spouse exceeding $300,000)
First, open a Self-Directed IRA using our easy online application. Next, fund your account via transfer, rollover, or contribution.
After you have opened and funded your account, you will instruct Madison Trust to invest in the private business or LLC of your choice. To finalize the investment, please submit to Madison Trust the following documents if you are investing in an LLC (as a minority interest owner)
Investment Authorization Form
Articles of Organization
Certificate of Good Standing (if the company has been in existence for longer than 12 months)
LLC Operating Agreement showing the IRA’s membership. The IRA as a member should be titled “Madison Trust Company, Custodian FBO [Account holder’s name & MTC Account #]”
Once all of this is submitted and approved by an Investment Specialist, Madison Trust will countersign the Operating Agreement Signature page and return a copy to you and the Investment Sponsor. We will also issue a check or wire from your IRA to the company you choose in the amount specified on your Investment Authorization Form.
If you are investing in a Private Business or Private Placement, please submit the following documents to Madison Trust:
Private Placement Memorandum (PPM)
Post-Funding - Please submit to us a fully executed copy of the subscription agreement with the investment sponsor’s signature certifying that they accepted your IRA’s investment.
If you are looking to invest in a Stock Purchase in a Private Company, please submit to Madison Trust the following documents:
Stock Purchase Agreement
Articles of Organization
Certificate of Good Standing (if applicable)
Madison Trust will countersign the Operating Agreement Signature page and returns a copy to you and the Investment Sponsor. Then, we will issue a check or wire from your IRA to the company in the amount specified on your Investment Authorization Form.
Are there any kinds of private businesses that my Self-Directed IRA cannot invest in?
Self-Directed IRAs do not qualify as S-Corp shareholders and therefore cannot own S-Corporation Stock. In addition, Self-Directed IRAs cannot invest in life insurance or collectibles (artwork, certain metals and coins, stamps, etc.)
Can my Self-Directed IRA invest in my personal business?
No, if your IRA transacts with you personally (or with a company you own) or with a disqualified person (e.g., IRA owner, spouse, children, parents, etc.) this would violate the prohibited transaction rule. There are specific family members that can however invest in your company, including siblings, cousins, aunts, uncles, and anyone else that does not fall under disqualified persons.
If I own 15% of a company personally and do not work in the business (solely as an investor/owner), can I purchase some additional units with my IRA?
Yes! You can buy new units from the company with your IRA. However, be careful not to sell any of your personal units around the same time as you buy your additional units. This may be seen as an indirect prohibited transaction where you exchanged personal ownership for ownership in your IRA.