There has been some confusion about the use of a LLC in conjunction with The Entrepreneur Retirement Security Plan of America (ERPA) . LLCs are limited liability entities and are generally considered as pass through entities for tax purposes with some attraction for particuliar situations. They do not qualify, however, in transactions contemplated by a ERPA type transaction. Qualified plans can, in most all cases, lend or invest in C type corporations.
There are situations where a LLC can be utilized as part of the structure but it is not advisable for someone to use their qualified plan to capitalize the C corporation and then the C corporation to fund the LLC.There is a rule known as substance over form and there is a real possibility this structure will fail the test and thus disqualify the transaction resulting in a deemed distribution subject to taxes and penalties.
One further note: LLCs can be subject to higher taxes in some respects and are somewhat inflexible for long term planning purposes. LLCs work extremely well in other situations so make certain that your tax professional is aware of your entire situation before using a LLC as part of your business structure.
Can the C Corporation be owned 100% by The Entrepreneur Retirement Plan and America?
The answer is technically yes, but is generally not the best solution. We recommend that the business owner own a minimum of 5% of the stock. Although there are also ERISA compliance reasons for the split, for tax purposes, the split ownership is in place to maintain our options for business and tax planning looking forward….not just at closing.
With the vast majority of the company owned by the plan you still allow yourself the ability to dividend profits or sales proceeds into the plan should you wish. By having some ownership individually, you keep the option alive for buying plan owned stock back into treasury and the individual owning 100% of the company without the individual having to take personal savings to consolidate their ownership in the company.
If all stock is repurchased from ERPA, the 5% stock you owned in the beginning is now 100% of the outstanding stock. At that point of transition to individual ownership, you can make S elections or other restructuring options that were not previously available.