Invest in an LLC or Private Business with a Self-Directed IRA

Key Points

A Self-Directed IRA can invest in a private business/LLC and can reap large returns.
The types of private companies you can invest in with your Self-Directed IRA include hedge funds, startups, REITs, and crowdfunding, among many others.
Before you jump into investing in a private business or LLC, it is important to conduct due diligence.
There are different documents required based on the type of asset you are investing in.

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.

What is a Private Business?

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.

What is an LLC?

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.

Private Business and LLC Opportunities

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:

Hedge Funds
A private investment partnership and pool of funds that use strategies to invest or trade in complex products to hedge risks to investors’ capital against market volatility by employing alternative investment approaches.

For example, a company that strategically trades in many different markets including equities, debt, futures, etc.
Startup
A new company founded by entrepreneurs in the first stages of its operation. These companies generally start with high costs and limited revenue, so they look to investors for capital.

For example, a new tech startup, restaurant, etc.
REIT (Real Estate Investment Trust)
A pool of real estate investors used to invest in income-producing real estate investments. You can buy stock and earn the share of income produced by the real estate investment.

For example, investing in a company that pools together money to invest in commercial real estate.
Crowdfunding
The use of small amounts of capital from a large number of individuals to finance a new business venture.

For example, a company is planning to produce a movie through crowdfunding efforts.

What You Need to Know Before Investing

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.

1

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?

2

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.

3

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.

4

Accredited Investor
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)

Ideal Account Type

Self-Directed IRA – All IRAs must be held by a custodian, such as a bank, authorized trust company, or any other entity approved by the IRS to act as an IRA custodian. A Self-Directed IRA is a popular account type for retirement investors who wish to invest in alternative assets that do not involve a high frequency of transactions, such as a private business or LLC investment.

How To Invest in Private Business or LLC (as a minority interest owner)

1

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 #]”

2

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)

If a PPM is not available, please submit the company’s Operating Agreement, Articles of Organization, Certificate of Good Standing (if applicable)

Subscription Agreement


Once these documents are submitted, Madison Trust will countersign the applicable signature pages and return the copy to you and the Investment Sponsor. Madison Trust will also issue a check or wire from your IRA to the company in the amount specified on your Investment Authorization Form.
3

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

Operating 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.

Conclusion: Let's Put It All Together

Investing in a private business or an LLC can help grow your retirement account. However, these investments are risky and involve proper due diligence. As the IRA account holder and investor, you are responsible for conducting research on the business and determining whether it is a good investment for your retirement strategy. The custodian’s primary function is to maintain the tax compliance and tax-advantaged status of your account.

Private Business and LLC – FAQs

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.

Ready to start investing in your future?

Reach out to our team, and we’ll answer any questions you may have.
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Madison Trust Company 401 East 8th Street • Suite 200
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Madison Administration Company One Paragon Drive • Suite 275
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