QUESTION:
My intent is to co-invest with my 401k in newly formed LLC, to be capitalized 24% by 401k and 76% by me. This is to enable funding of land and the design and build of building for purposes of lease to third parties and income generation. Can you explain any particular requirements for such scenario?
ANSWER:
To confirm, it will need to be a newly formed LLC which means units have not previously been issued. This is very important as it may be a prohibited transaction if the solo 401k owner also invests personal money in an existing LLC that had previously been funded with his or her solo 401k funds.
Following are some more important requirements:
- Each member’s interest must be listed on the LLC operating agreement (in this case, the solo 401k and solo 401k owner’s interest);
- The LLC operating agreement must include language pertaining to the 401(k) and IRS regulations;
- The LLC cannot incorporate non-recourse financing or recourse financing because the solo 401k owner also invested in the LLC;
- If the solo 401kowner is the manager of the LLC, he or she cannot receive any compensation;
- The solo 401k owner can not perform any sweat equity work on properties owned by the LLC;
- The bank account will need to be opened in the name of the LLC;
- All income and expenses must flow through the LLC bank account; and
- From a solo 401k distribution planning perspective, once the solo 401k owner starts taking distributions from the Solo 401(k), the income has to flow from the LLC bank account to the 401(k) first and then the solo 401k owner can process distributions from the solo 401(k).
