Hundreds of companies and their websites advertise the Checkbook Control IRA by many different names: Checkbook IRA, Checkbook LLC, IRA-LLC. The Checkbook Control IRA is recommended for many different applications, but once the LLC is created, what do you do next?My goal in this piece is to describe the proper care and feeding of a “checkbook control” IRA-owned LLC, which in many ways looks just like a regular LLC – but is a very different entity with special needs and requirements. In addition, I want to point out some of the potential areas where extra caution is required.First and foremost, it is important to realize that your IRA-owned LLC is an entirely independent and separate entity. Created by and owned by your IRA (not you), it is rather unique in the world of small business. Because of the IRS's rules related to transactions within your IRA, you need to step carefully and pay more attention to the process than if you were using only personal funds. Your IRA funds are special due to the tax status that the IRS granted when you created your IRA.To make sure you visualize the entity as one separate from you, I will call the IRA-LLC Elsie for the purposes of this article. Let's imagine that Elsie is your niece and you will be investing on her behalf. She knows nothing about investing or the IRS rules, so you'll have to make sure that not only is she making money, but she's following all the rules. Keep in mind that the goal of this article is to help you keep Elsie's activities and investments within the IRS rules for IRA investments and transactions. Note that there are additional rules about transactions with an IRA's assets which go beyond the coverage of this article. Contact a self-directed IRA custodian for more details.Elsie: With your newly created Checkbook control IRA-LLC (Elsie), you are the manager responsible for the operations of the new business. As with any new business, you need to keep excellent records. When you choose and make investments for Elsie, the documentation for the transactions is important for two reasons. One, you must be able to prepare income and loss statements, as well as balance sheets for Elsie. Two, you must be able to show that Elsie's transactions did not benefit you as an individual or any disqualified persons as according to the IRS.Elsie probably already has a new tax ID number, but if she doesn't you need to get her one. The bank of your choice will need the ID to open a checking account for Elsie, to receive the proceeds from your IRA. Note that the unique tax ID for Elsie is necessary as your Self-Directed IRA usually shares a common tax ID with all the other IRAs held by your custodian or administrator. If you haven't done so already, visit the IRS website at www.IRS.gov and obtain a new Tax ID. The Tax ID is also referred to as an EIN (employer identification number), which is the equivalent of a social security number for an individual. The IRS has a simplified online system for the establishment of the number or you can submit a form called an SS-4.Once the checking account is open, you can direct your IRA to purchase the ownership interest in your new IRA-owned Checkbook control LLC (Elsie). Once Elsie has money, then you need to think about how to keep track of those funds. Remember, those funds belong to Elsie, not you. Always remember that a certain government entity with the initials IRS might be looking over your shoulder at some point in the future.The first step in recordkeeping is adopting a system. Many small businesses begin with software such as Quickbooks, Peachtree, or other accounting systems. I don't recommend personal accounting systems such as Quicken or MS Money because they are geared towards personal expense tracking rather than a full business tracking system. Because Elsie is a full-fledged entity, she must have a complete set of books and records for her activities. The small business accounting systems will be of great benefit for producing statements for her operations.Once you have your software, the next step will be to develop a system of tracking the paper generated from Elsie's investments and other activities. Depending on what investments you decide for Elsie to make, the paperwork can be significant. If she buys real estate, there can be lots of paper – statements, invoices and receipts. However, if she buys something like a note, the paperwork can be much more limited. In either case, once again, due to the additional burden imposed on tax-sheltered investments and IRA funds, it is critical that you be able to show how all of Elsie's funds were used. And why. Fully documenting any expense and income is the best way to show that Elsie remained under the tax shelter of the IRA and to show that you (or any DQ person) were NOT involved in the transaction. For more info on transactions and the consequences of being involved in a transaction with Elsie, see the Appendix.Because Elsie is likely to have relatively few transactions, you should develop a routine to have documents, such as bank statements, invoices, and receipts, segregated from your own personal records CONTINUOUSLY! Many small business owners have suffered from the tendency to treat their small business operations rather casually until tax time. Elsie's funds are not yours and therefore it is critical that you stress the separate handling of all of her activity. Someone may be looking at your records in the future. Protect your IRA and its tax-sheltered status from any question.If you don't separate your own business documents and assets from Elsie's, the penalties can range from the disqualification of your entire IRA (resulting in taxes and penalties) to Federal Criminal prosecution for tax evasion and money laundering. I cannot stress enough that Elsie is not you, and her money is not yours. Treat her funds like they belong to a suspicious relative who is likely to show up at anytime and be very skeptical about how well you are taking care of his money. You should be ready at any time to show your crabby relative what you have done with his funds.Now, with your recordkeeping system in place, your checkbook in front of you (with Elsie's funds in the account), it is your time to search for her first investment.
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