Recent Forbes "IRA Adventures " implied your IRAs could own your business

[Guest tclviii=rira]

the article seemed to imply that one could work for one's own business, because " . . .

My question is, can one set up a sole proprietorship consulting/investment management business this way?

i.e LLC is owned by my IRA and has two lines of business:

1) consulting on managing energy risk [oil, Nat gas futures & swaps, Physical electricity]

2) running a hedge fund, initially seeded at $3 million of my own funds, (funds NOT derived from my IRAs) with an eye towards establishing a track record to attract more hedge fund investors . . . [i.e. I would provide seed money in exactly the same fashion that a hedge fund incubator would]

While I know can't set my own salary, can I establish my salary according to a "rule", i.e. substantially all the billings/revenues go to me as an employee [and are thus taxable as my income], up to a cap of say, $500k, the rest are distributed to the LLC shareholders [which happens to be my IRA]?

While I would have thought that my providing services to the LLC [its my hours that the LLC is billing the client for] might have been a seeprate kind of prohibited transaction [seperate from the conflict of setting my own salary], the Forbes article would seem to indicate that as long as I'm not the CEO, and someone else is making the decisions, it is not a problem.

relevant quote from Forbes "IRA Adventures" [Oct/4/2004] below:

"Investing in your own (or a close relative's) venture can get tricky. While the law doesn't ban investments in a private company, it does prohibit certain self-dealing transactions between an IRA and a "disqualified person" (the IRAowner, his parents, his child or even a descendant's spouse). Penalties for self-dealing are onerous--for example, all the money in a traditional IRA becomes taxable as of the start of the year of the violation. In the case of a Roth, all the earnings become taxable.

The basic rule is this: An IRA can only be invested directly in a business if the owner of the IRAand his direct relatives own less than 50% of that business. But there's a de facto exception for new ventures. At the point you are about to start a business, you don't yet own any of it. So you can use IRA funds, in unlimited amounts, for the startup financing. This sounds like hairsplitting. But Ft. Worth, Tex. estate lawyer Noel Ice--who is no fan of this gimmick--says it works, based on the 1996 Swanson Tax Court case.

The self-dealing rules create additional complications if you're planning to work for your business, since you can't set your own pay. Patrick Rice, a real estate broker who runs www.iraresource.com, recently helped two couples use their IRA money to buy businesses--one a bed-and-breakfast, the other a convenience store. The couples each set up a limited liability company, owned 90% by the IRA, to acquire the property. An unrelated outsider bought the other 10% of the LLC and became its manager. That person then hired the couple to run the business and set their compensation--a key to making this kosher."

[Alf]

No. It would violate 4975©(1)(E) and (F), whatever that means.

[mbozek]

You need to retain qualified tax counsel to detemine what forms of ownership will not violate the PT rules. It will cost a few bucks but you will know what the tax law issues are. You can't get free advice on this issue that you can rely on.

There is a separate question of whether it makes good business sense to put your business in an IRA since the IRA cannot take advantage of favorable tax law provisions for cap gains and deduction of business expenses. The IRA will have to retain liquid assets to pay expenses of the business. IRAs are also subject to UBIT tax. The only reason to put a business in an IRA is that it is a cash cow that generates a steady stream of income that would be taxed a marginal rate above 15%.

[John G]

I concur on seeking local advice of professionals... and not just one! Your proposal raises many issues and there are potential arrangements regarding pension/profit sharing and other structures that might be beneficial.

I sure hope all this thinking was not just because you read an article. I can tell if you already have this business up and running or are just speculating on the idea. The comments about if you are the CEO or not are a little confusing, I would imagine that would be pretty clear before you got started.

Do you know anyone in the hedge fund industry? Have you current or prior experience in running a business? What has been your track record in the past five or ten years? I know a few folks in the hedge fund industry, and they all demonstrated their skills in managing a portfolio long before they got their hedge fund started. I ran essentially a private fund (under 30 participants) for a number of years using a Sub S format which was a lot easier than the registration route. It is difficult to just manage your own assets and make a convincing case to manage the money of others. I guess I am saying that your proposal is very complicated and challenging and that thinking about the IRA issue is probably a distraction. (my two cents)

[Guest tclviii=rira]

mBozeck Wrote:

> You need to retain qualified tax counsel to detemine what forms of ownership will not violate the PT rules. It will cost a

> few bucks but you will know what the tax law issues are. You can't get free advice on this issue that you can rely on.

yeah, i figured I'd have to do that, but don't really know any lawyers/accountants that specialize in Roth/IRAs; and I haven't gotten a lot of response from the folks mentioned in the Forbes article. As the forum Moderator do you have

any recommendations?

> There is a separate question of whether it makes good business sense to put your business in an IRA since the IRA

> cannot take advantage of favorable tax law provisions for cap gains and deduction of business expenses. The IRA will

> have to retain liquid assets to pay expenses of the business. IRAs are also subject to UBIT tax. The only reason to put a

> business in an IRA is that it is a cash cow that generates a steady stream of income that would be taxed a marginal rate above 15%.

well, the consulting thing is a bit of a cash cow, with a big payout at the end, [see below]

JohnG wrote:

> sure hope all this thinking was not just because you read an article. I can

tell if you already have this business

> up and running or are just speculating on the idea.

I'm coming off a noncompete, have an opportunity to get involved in some energy

private equity transactions [in exchange for a percentage of the carry], and

I'm trying to decide how i should organize the form of my involvement

> The comments about if you are the CEO or not are a little confusing, I would

imagine that would be pretty

> clear before you got started.

my understanding from the Forbes article is that I COULDN'T be the CEO, or set my own salary, but my roth could be a 90% shareholder by using the "before the formation of the business" exclusion mentioned in the Forbes article

> Do you know anyone in the hedge fund industry? Have you current or prior experience in running a business?

> What has been your track record in the past five or ten years?

ran a proproprietary energy trading desk for 5 years, 15 years prior experience working on the street trading energy and fixed income derivatives; published a few technical articles [modesty prevents me from saying much but you might want to google "commodity covariance contracting"] . . . I currently run small allocations for two local NYC charities on a pro bono basis

[John G]

Finding someone who is knowledgeable for your situation is going to take some time. I think I would start by talking with other folks running businesses in your area and asking who they use for tax accounting and legal work. That is only a start, because you need a lot more than someone to prepare a tax return.

Your Roth proposal is complicated, and you probably should not assume that it is the best solution to your proposed business format. You certainly want to procede with your own DD and find a pro to ensure that your final format is bullet proof as the entire tax free status could be jepardy with a bad scheme.

Post your city or state - it might help.

[Guest tclviii=rira]

> Post your city or state - it might help.

>>> I currently run small allocations for two local NYC charities on a pro bono basis

I s'pose it wouldve been clearer had i put the "local" in CAPS

[John G]

In the internet era, keyboard = home. You could be anywhere in the world and be a consultant. You question is too narrow to be answered here, but as I am not one to pass the buck, I will post again.

Since 56 years have passed since Alfred Gray started the first hedge fund, you should assume that someone has already figured out the angles. NYC is swarming with hedge funds, and half of them are not even 4 years old. While you still need a good tax lawyer and tax accountant, you might be able to start networking from these contacts:

My experience has shown that the single best way to track down a professional (or data source) is to call the association for that industry. Just cut to the chase and contact: Hedge Fund Association 2875 N.E. 191st Street, Suite 900 Aventura, Florida 33180 USA Phone 202-478-2000 info@thehfa.org There is also a Texas HF association, so I imagine there might be one in NYC. There are also associations of hedge funds managers, women in hedge funds, etc. {sort of a dot.com type craze over hedge funds right now... most won't produce and die a fast death}

General primer: How to Create and Manage a Hedge Fund: A Professional's Guide by Stuart A. McCrary Note Chapter 6 provides and overview of HF business models and Chapter 11 covers a range of regulatory issues. This book tends to focus on "best practices" and is a reasonable general reference. It does not look like it directly comments on your proposed scheme. 350 pages

Academic coverage: Finance 890, a HF course at Wharton - Professors Geczy and Metzger, taught in 2004 Not aimed to your question, but a different line of inquiry that might prove productive.

Tom Augenthaler at the Hedge Fund Center (tom@hedgefundcenter.com) - he has set up a website clearinghouse for hedgefund operators. No direct experience with this shop, my guess is that he is a one man band. More likely a networking source rather than a direct source for your question.

Since your field seems to be energy related, you will find a non-energy shop more likely take your call.