What is a Checkbook LLC or Checkbook IRA?

Estimated reading time: 6 minutes

Savvy investors looking to take greater control of their retirement portfolios often to one type of investment account – a self-directed IRA (SDIRA). Rather than being limited to stocks and bonds, these accounts allow for a wider range of investment opportunities, including real estate, private equity, precious metals, and more.

Those seeking even greater control often turn to a checkbook LLC. This unique structure provides SDIRA holders with direct access to their funds through a checking account, offering unparalleled control and flexibility in managing their investments.

In this article, we’ll provide a comprehensive understanding of checkbook LLCs, including the benefits and potential drawbacks of this investment vehicle. 

Table of Contents

• Definition of a Checkbook LLC
• Benefits of a Checkbook LLC
• Potential Drawbacks of a Checkbook LLC
• How to Set Up a Checkbook LLC
• Explore Checkbook LLCs at Entrust

Definition of a Checkbook LLC

A checkbook LLC goes by many names, including a checkbook IRA or self-directed IRA LLC (IRA LLC). 

Regardless of the name, a checkbook LLC is a specialized investment structure used by SDIRA investors. It involves the creation of a limited liability company that is wholly owned by the SDIRA. The primary purpose of a checkbook LLC is to provide the IRA owner with direct access to their IRA funds through a checking account controlled by the LLC.

In a “normal” SDIRA, every investment decision must be coordinated with your SDIRA provider. For instance, at Entrust, rather than directly purchasing an alternative asset like real estate or private equity, you submit what is known as a "Buy Direction Letter” (BDL). If properly filled out, the BDL gives us all the information we need to execute the transaction on behalf of your IRA.

However, this process is more labor-intensive than purchasing shares of Microsoft on the public markets. So, administrators often charge small transaction fees to account for the time and labor involved.

With a checkbook LLC, you can make investment decisions and write checks directly on behalf of the LLC, offering greater control and flexibility over your IRA funds.

Benefits of a Checkbook LLC

Here are three of the main benefits of a checkbook LLC for SDIRA holders:

1. Checkbook Control and Flexibility

By establishing an LLC within your SDIRA, you gain what is known as “checkbook control.” This means you can directly access your funds and make investment decisions without coordinating with your administrator. This allows for greater flexibility and quicker execution of investment opportunities.

While this increased control is beneficial, it also requires the investor to exercise greater due diligence to ensure compliance with IRS rules and regulations.

2. Cost Efficiency

 Consolidating investments under an LLC may also reduce your administrative fees, through two methods:

• Fewer Transaction Fees: An IRA LLC means you don’t have to coordinate with your administrator each time your IRA needs to write a check, reducing transaction fees.
• Reduced Recordkeeping Fees: With an IRA LLC, you can house all of your SDIRA investments under a single umbrella, potentially reducing recordkeeping fees.

3. Privacy and Confidentiality

When you invest directly as an individual, your personal information may become public in certain scenarios. By using an LLC, you could maintain privacy by conducting investments and transactions in the name of the LLC.

Potential Drawbacks of a Checkbook LLC

While a checkbook LLC can provide significant benefits for self-directed investors, it also comes with complexities and responsibilities. Here are a few points to consider before establishing your own checkbook LLC:

1. Complexity and Legal Compliance

Establishing a checkbook LLC involves a series of legal and administrative steps, including forming the LLC, obtaining an employer identification number (EIN), and opening a checking account. Ensuring the LLC is set up correctly and complies with all IRS regulations is crucial to avoid penalties.

Managing a checkbook LLC requires diligent record-keeping and regular oversight. The IRA owner must maintain accurate records of all transactions and ensure that all activities comply with IRS rules and regulations.

2. Risk of Prohibited Transactions

Prohibited transactions are dealings that the IRS has determined would unfairly benefit the IRA owner or other disqualified persons. These transactions can lead to severe penalties, including the disqualification of the entire IRA.

3. Additional Costs

Establishing a checkbook LLC involves initial costs, including state filing fees for forming the LLC and fees for obtaining an EIN. Depending on the state of incorporation, there may be annual filing fees, franchise taxes, and other compliance costs associated with maintaining the LLC.

How to Set Up a Checkbook LLC

Creating an LLC for your SDIRA involves several steps that must comply with state regulations. Here’s a streamlined process to help you get started:

1. Open Your SDIRA: After you establish your account at Entrust, you will need to fund your IRA with a contribution, transfer, or rollover.
2. Choose a Name for Your LLC: Select a unique and appropriate name for your LLC that complies with your state’s naming requirements.
3. Register Your LLC with the State: File your articles of organization with your state’s business office. Each state has specific requirements and fees. For instance, California requires an annual tax of $800 for LLCs.
4. Apply for an Employer Identification Number (EIN): Obtain an EIN from the IRS for your LLC. This number is used for tax purposes and to establish the LLC. 
5. Choose a Registered Agent: Designate a registered agent who can accept legal documents on behalf of the LLC. You can find registered agents through your state’s Secretary of State office.
6. Create an Operating Agreement: While not all states require an operating agreement, it’s crucial to have one, especially when investing with an SDIRA through your LLC. This document outlines the management structure and operating procedures of the LLC.
7. Ensure Proper Ownership Structure: The LLC must be set up so that the SDIRA owns 100% of the LLC. The SDIRA account holder cannot own the LLC directly to avoid prohibited transactions and maintain the tax-advantaged status of the SDIRA. Typically, the SDIRA account holder is listed as the manager of the LLC.
8. Open a Checking Account for the LLC: Once the LLC is established, open a checking account for it. This account will be managed by the SDIRA holder, providing “checkbook control” for conducting transactions on behalf of the SDIRA.

Important Note: The SDIRA must be the sole owner of the LLC. All income from the LLC must go back into the SDIRA, and all expenses related to the LLC investments must be paid from the SDIRA. No funds can be transferred to your personal accounts.

Consider consulting with legal counsel familiar with both your state’s LLC laws and IRS regulations for IRAs. This can help ensure your documents are correctly prepared to avoid prohibited transactions.

Here is a list of contacts other Entrust account holders have used to establish checkbook LLCs.

Streamline Your Investment Strategy with an IRA LLC

Explore Checkbook LLCs at Entrust

If you’re seeking more control, flexibility, and asset protection over your retirement funds, a checkbook LLC could be an ideal investment vehicle for you.

However, investing through an LLC involves additional costs and tax considerations. Consider consulting with a knowledgeable tax advisor or financial professional to understand the specific requirements and implications based on your unique situation and jurisdiction.

If you’re a real estate investor seeking the benefits of checkbook control, consider the myDirection Card. Available exclusively from The Entrust Group, this card provides 24/7, immediate access to your IRA funds. So, you gain many of the benefits of checkbook control without the administrative hassle of setting up an IRA LLC.

If you’re unsure whether an IRA LLC is right for you, talk with one of our SDIRA experts. Or, if you’re ready to get started on your self-directed journey, open an account with The Entrust Group. We have over 22,000 clients and 40 years of experience in empowering investors to reach their financial goals, and we’re just getting started.

Finally, if you want to learn more about IRA LLCs from an expert, watch our webinar replay, Investing With IRA LLCs: Is Checkbook Control Right for You? In the session, we were joined by Jay Butler, Managing Director at Asset Protection Services of America. You’ll learn:

• The unique advantages that make LLCs valuable for IRAs.
• Potential risks associated with investing through an LLC.
• Permitted investment options and regulations to avoid penalties.