In simple terms, a Checkbook Control IRA is an investment structure where the IRA account is an owner or “member” (jointly or fully) of a newly created LLC or other business entity type. This entity is then managed by the IRA account owner, giving them complete control over the LLC entity activities. This structure may be commonly referred to as an IRA LLC, a Checkbook Control IRA, or Single Member LLC. This investment is accomplished through the use of a self-directed IRA custodian which allows for this type of investment. See What is a Self Directed IRA
After the LLC or other business entity is formed, the IRA owner would then instruct the self-directed IRA custodian to fund the newly created business entity. This “initial funding” adds cash to the LLC’s bank account, and in exchange, the IRA account now holds proof of ownership of a small business; this is not too dissimilar to having physical stock certificates of a large company.
As Manager of the IRA LLC, the account owner is then afforded all of the perks and responsibilities that come with this role. This will generally include establishing and maintaining the business banking account for the LLC, directing the LLC’s investment activities, overseeing the payment of all expenses and deposits, and managing all aspects of the LLC’s day to day operations. The LLC Manager is also empowered to negotiate investment terms and execute contracts on behalf of the LLC. The Manager will be responsible for properly accounting for all money coming and going from the LLC, as well as the safekeeping of any documentation pertaining to the LLC’s activities (this of course may be outsourced to a competent financial professional or CPA if desired).
The IRA custodian will still be involved in the oversight of the self-directed IRA account, but rather than cash or a publicly traded stock, such as Apple or Google, the custodian will report the IRA owning part, or all, of a privately held company; let’s say “ABC LLC” for example. This type of structure essentially moves the custodial duties pertaining to the cash from the IRA custodian to the Manager of the LLC. Keep in mind however, that any additional personal contributions to, or distributions to or from the IRA account, must first funnel through the IRA custodian prior to being deployed to yourself (as a distribution) or to the LLC (as an additional funding to the LLC).
Utilizing this structure provides the LLC Manager with increased speed, efficiency, and control over the IRA’s investment activities as it compares to the IRA custodian facilitating the activities of the IRA account.
However, as you can imagine this kind of freedom comes with a price. That price is the additional risk placed on the self-directed IRA account owner of violating the prohibited transaction rules; thus jeopardizing the entire IRA account. Accordingly, the IRA account owner and/or the Manager of the LLC must have a thorough understanding of these rules in order to stay out of trouble. A full explanation of the prohibited transaction rules can be found here.