Investors in LPs are called partners while investors in LLCs are called members. The partners/members pool their funds to invest in trust deeds, real property, etc. Any income generated by the investments flows back into the LP or LLC to be reinvested by the LP/LLC or distributed to the limited partners/members.
The LP/LLC files a K-1 each year reporting each partner’s/member’s share of the earnings. Normally earnings on investments held within an IRA are not taxed until the IRA Owner takes a distribution. However, sometimes the LP or LLC generates unrelated business taxable income (UBTI). If an LP or LLC generates UBTI it may be reflected on the K-1. If an IRA investment has UBTI the IRA must file IRS form 990-T and pay unrelated business income tax (UBIT). This tax must be paid from cash held in the IRA holding the LP/LLC. We do not prepare the 990-T for the IRA Owner.
When IRA funds are used to invest in LPs/ LLCs, the partner/member is Provident Trust Group FBO (IRA Owner's Name) IRA (or Roth IRA) and the tax ID number is that of the Custodian. Normally an LP/LLC will have an Operating Agreement, an Investor Questionnaire, and/or a Subscription Agreement. The IRA Owner reviews all documents, answers any investor questions, and signs each signature page as read & approved. The IRA Custodian signs as the new partner/member/investor.
The IRA must be a passive member of the LP or LLC. The IRA cannot be the General Partner of an LP or the Managing Member of an LLC. In addition, once the LLC is funded, no further contributions or capital calls are allowed if the IRA, IRA Owner and any disqualified persons own 50% or more of the LLC.
If the IRA owns 100% of the LLC, the assets in the LLC are considered assets of the IRA. In this case, the Operating Agreement or Subscription Agreement must require that the managing member either appoint a qualified professional such as an attorney or CPA to either conduct a review of each transaction before execution, or take over as managing member.
LP and LLC Investment Guidelines