I am a newbbie to forums protocol so please forgive if this post is inappropriate. In particular, I have posted this question on another forum and have not received any replies. Some direction is felt to be urgently needed, so I am asking for some guidance from you guys. Thanks in advance!


DIY Procedural Question:
Subject: LLC-owned, Self-Directed, ROTH IRA - Initial Formation Quandaries

Background:
In a couple of years (2010), certain investors will have the opportunity to convert existing 401K and Traditional IRAs into ROTH IRAs in a tax-advantaged environment. The requirements are straight forward and unambiguous - choose an acceptable ROTH Custodian, rollover the existing IRA funds into a newly established ROTH, pay the attendant taxes, and invest the ROTH funds in assets which are allowed by the Custodian and not disallowed by the DOL or IRS.

Interestingly though, there are additional provisions in the interpretation of ROTH rules and regulations which allow for the implementation of “checkbook control” of a self-directed ROTH IRA. But, the initial procedural steps necessary to properly structure such an entity are not well documented, and it is this area that I wish to pose the following questions.

1. The “operating” environment of a properly established LLC-owned, self-directed Roth IRA (ROTH-LLC) is pretty simple. A Custodian administers the ROTH Account. The ROTH Account owns one asset - all membership units of an LLC (which were paid for or bought from the capital deposited to the ROTH Account). The LLC is managed by the individual investor who owns the ROTH Account. All day-to-day business activity of the LLC (viz., investment and management of the assets represented by the ROTH capital influx) is conducted by the manager, who, annually, reports the status of the LLC to the Custodian.

But how one starts from scratch and arrives at the time when this environment is the norm is not clear.

Consider the following scenario. One of the most basic inhibitions of the ROTH-LLC body of regulations is that the investor/owner shall not co-mingle private and IRA funds. This is illustrated with the common example in which the LLC wishes to acquire an asset but does not have sufficient capital to purchase ownership. A tempting solution for the manager is to use his/her own capital in sufficient amount, when combined with that of the LLC, to effect the purchase. However, such deals are simply not allowed. Now, here is my quandary.

In the beginning, the LLC must be in existence before the ROTH Account can “invest” in it by purchasing all membership units. In order for the LLC to exist, the owner must supply at least enough capital to cover all state registrations and filing fees. Since no ROTH funds are accessible in this stage, the expenditures are necessarily funded by the investor/owner from non-IRA wealth. At a later date, assuming all other steps are successful, the Custodian “approves” the purchase of this new LLC for the ROTH-LLC Account. At this point, what exactly is the ROTH buying? The LLC at this point has not assets, no income, and only expenses to show for itself. Not a particularly attractive investment candidate for a due-diligence investor. Further, the LLC must have a bank account. To open an account requires the deposit of some minimal amount of cash. It seems that there is no way to rationalize away the fact that the cash in the bank, as well as the expenses carried on the books, represent owner-invested funds. So, can anyone explain the conundrum evident here?

2. A further point of my ignorance is that it is not clear what constitutes “doing business within a state”. Most states require a company, including LLCs, to register with the appropriate state department(s) if the company “does business” within that state. I have been repeatedly shuffled from agency to agency while attempting to obtain an answer from my state government what constitutes doing business within the state. Paraphrased, the bottom line answer has been, “you had better not be doing business in our state if we ask for your provenance and you can’t produce it”

My confusion is illustrated by the following example. An LLC is organized and properly registered in, say, Nevada. The only “asset” of the LLC is municipal bonds issued by, say, New York City. Now, how is the doing business concept applied in such circumstances? It seems obvious that the LLC is doing business in Nevada, but what does New York think? Is the LLC “doing business” there by purchasing municipal bonds specifically anchored to NY assets? Again, any clarification of such questions would be greatly appreciated.

Jim1Best, a DIYer.