Private Company Investment

Self-Directed Solo 401k Private Company Investment (passive only) Purchase Procedure

Summary

This is a summary of how to invest/purchase private shares in a private company (e.g., C Corp., LLC, and Limited Partnership) with your Solo 401k—also referred to as Self-Directed 401k, Self-Directed Solo 401k, Solo K, Individual 401k or Single 401k.

After you have opened and funded your Solo 401k checking account, here are the next steps in the private investment process.

Documents/forms provided by investment entity

  • Private Placement Memorandum/Offering Memorandum
  • Articles of Organization
  • Certificate from Secretary of State
  • Subscription Agreement/Stock Purchase Agreement
  • Accredited Investor Representations and Investor Questionnaire
  • Depending on investment entity type, one of the following:

If Corporation: Company By-Laws

If LLC: Operating Agreement

If Limited Partnership: Partnership Agreement

  • Additional documents to help determine if company will be successful:

Company’s latest Financial statements (for example, Balance Sheet)

Company’s 2 to 5 year financial forecast

Registering /titling investment documents

Review and confirm that private investment documents are:

  • Properly registered under the Solo 401k as the owner
  • That the Solo 401k’s EIN is listed
  • That you have signed as trustee of the Solo 401k

Example of how your Solo 401k’s investment interest in the entity should read:

Jane Do, Trustee of ABC Solo 401k Trust

Funding Investment

After all documents have been reviewed, approved and executed, it’s time to fund the investment by writing a check from your Solo 401k’s checking account made payable to the investment entity.

Ongoing maintenance

All investment gains must flow back to your Solo 401k’s checking account not your personal bank account.

Fiduciary QUESTION:

I would like to use funds from my solo 401k to invest in a private placement fund.   I explained to the gentleman who is assisting me with the subscription agreement that I do not need a independent fiduciary.  As the trustee of the solo401k, I am able to make decisions for the account without a fiduciary.  He sent me the attached supplement to the subscription agreement to complete.  In reading it, I do not believe this supplement applies to me.  Is this correct?  Any feedback would be greatly appreciated.

ANSWER:

Yes you still need to fill out since you are the trustee. Fiduciary and trustee mean the same thing in the context of a solo 401k plan.
You would list the solo 4o1k plan and then sign on behalf of the solo 401k plan.

Pooling Both Pretax and Roth Solo 401k funds for Private Investment QUESTION:

I have invested funds from my Solo 401k ROTH and Solo 401k Pretax accounts into a Real Estate private fund. What documentation or other information do you need to properly document and/or track the transactions?

ANSWER:

It is important that the investment is documented in the name of the Solo 401k and under the EIN for the Solo 401k (e.g., So that the K-1 is issued to the Solo 401K).
Moreover, you will sign as the trustee of the Solo 401k.
Even though you invested both pretax and Roth solo 401k funds, this can be structured as one single investment.
 For example, to fund the investment there would be one transfer from the pretax solo 401k sub account to the investment provider and a second transfer from a Roth solo 401k sub account to the investment provider. It would be acceptable for administrative ease for all the returns on the investments (e.g. dividends) to flow back to one single sub account and then the funds are divided between the pretax and Roth sub accounts based on the investment percentages.

1099-DIV & K-1 QUESTION:

During last year’s tax-prep season, I received a total of sixteen 1099s and K-1s filed against the EIN of my solo-401k.  I ignored these (for the second consecutive year).

My solo 401k trust is a member of a private investment fund. Do I need to file the K-1 and 1099-DIV with the IRS?

ANSWER:

The fund needs to issue them to satisfy their reporting. However, since a solo 401k is a tax-sheltered retirement account, the funds won’t be taxed until distributions begin, and the distributions will be tax free if withdrawn from the Roth Solo 401k side.
The 1099-DIV forms were issued in the name of the solo 401k and the plan’s EIN was used in the recipients i identification number box so the IRS will be able to tie it to the solo 401k plan’s EIN.
The solo 401k trustee holds on to them for their records but they are not required to file them with the government.

UBIT QUESTION:

Will my solo 401k trust be subject to UBIT on its pass-through income from its investment in a private fund?

ANSWER:

While a Solo 401k investment in real estate financed with non-recourse financing is exempt from the Unrelated Debt Financing Income (UDFI) tax, it could be subject to Unrelated Business Income Tax (UBIT) on pass-through income (e.g. if the Solo 401k owns an equity interest in an active business that provides goods and/or services and is taxed as a pass-through entity).  Ultimately, it will depend on the specific facts and circumstances such that it would be prudent for the client to determine this in consultation with his/her tax adviser.

How to Fill Out Subscription Agreement QUESTIONS:

I am in the process of filling out my first subscription document for my solo401k.
There is a section here that I am not very certain about.
From some online research I think it should be filled out like this, but was hoping you could verify.
And, perhaps add some of this to the FAQ?  I found the instructions in the FAQ’s on how to fill out a W-9, etc. useful.
Can you verify if these responses are correct for a solo401k? Here is the raw text, if useful…

ANSWER:

Here is the raw text, if useful…

Employee Benefit Plan Information

Yes No Investor is an “employee benefit plan” as defined in Section 3(3) of ERISA that is subject to the fiduciary provisions of ERISA (this includes U.S. pension plans and U.S. profit-sharing and 401(k) plans, “Multiemployer Plans” and “Taft-Hartley Plans” but does not include U.S. governmental plans, certain church plans and non-U.S. employee pension and welfare benefit plans).

Check yes since a solo 401k plan allows for profit sharing contributions.  

Yes No Investor is a plan as described in IRC Section 4975(e)(1) (e.g., U.S. individual retirement account, Keogh Plan).

Check ye since  a solo 401k plan is for owner-only businesses.  

Yes No Investor is an insurance company investing the assets of its general account (or the assets of a wholly owned subsidiary of its general account), the underlying assets of which constitute “plan assets” within the meaning of Section 401(c) of ERISA.

Answer no.  

Yes No Investor’s underlying assets include “plan assets”, either by reason of investment by “benefit plan investors” (as defined in 29 C.F.R. 2510.3-101(f)) in a class of equity interests of Investor in an amount equal to 25% or more of the value of such class of equity interests (excluding for this purpose the value of any equity interests held by any person, other than a benefit plan investor, that has any discretionary authority or control with respect to the assets of the Investor or provides investment advice for a fee with response to such assets, or any affiliate of any such person), or for any other reason. Select yes if the solo 401k plan will owns 25% of more interest of the investment. This question appears to deal with the Plan Asset Rules which apply to self-employed solo 401k plans including solo 401k plans. 

Yes No Investor is an “employee benefit plan” as defined in Section 3(3) of ERISA not subject to the fiduciary responsibility provisions of ERISA. Check no as a solo 401k plan is defined contribution plan not a DBP. 

Additional Items to Consider when filling out a subscription agreement for an investment made using solo 401k funds.

  • Please consider the sections of the subscription agreement that address ERISA and unrelated business income tax (which is referred to as “unrelated business taxable income” in the document).
  • If you choose to proceed you will, of course, be investing via the Solo 401k which means practically the following:
    • The Document must be in the name of the Solo 401k where you sign as the Trustee;
    • Use the EIN for the Solo 401k;
    • The Solo 401k is a revocable retirement trust and for any date organized you would use the effective adoption date which is found on page 2 of the Adoption Agreement;
    • If the subscription requires you to do so, please note that the Solo 401k is a self-directed employee benefit plan;
    • If a W-9 is required, it should be completed as follows.
1) Name: Enter name of Solo 401k plan
2) Business Name/DBA: Leave blank
3) Check the box in front of “Trust”
4) Enter “Retirement Trust” in blank space after “Other”
5) Enter “1” in blank space after “Exempt Payee Code”
6) Enter address
7) Leave SSN blank
8) Enter 401k EIN in “Employer Identification Number” section
9) Sign & Date.
Note: If both solo 401k participants (e.g., husband and wife) invest their respective funds under the solo 401k plan (with two separate wires to fund the investment), this would be titled as simply one investment in the name of the Solo 401k and any return on the investment (e.g. interest, dividends, etc) would flow back to the respective Solo 401k participant accounts in accordance with the ownership percentages.
This information is for informational purposes. For information specific to your investment situation, MySolo401k.net recommends consulting with a qualified tax advisor, CPA, financial planner or investment manager. MySolo401k.net is 401k provider; therefore, it does not offer investment or tax advice, nor sell investments.

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