Do I need to have two different LLCs?

Question

I want to set up a solo 401k (from my regular 401k) after I quit my job and go into real estate full time. I understand how to do this and that's not my question. However, I have personal savings outside of my 401k that I also would like to invest in real estate. I want an LLC (or something else?) to protect me personally in every situation.

So do I need to set up two different LLCs? One funded by my 401k and another funded by my own personal assets?

Would like to know more about self directed 401k under an LLC. Any insight on the topic would be wonderful, thanks.

Brian Eastman · Answer

@Nicholas Patrick

You would ABSOLUTELY need two different vehicles.

The Solo 401(k) may not require an LLC.  That would only typically be necessary for purposes of risk segregation within the Solo 401(k).  Most investors just invest directly with the Solo 401(k) trust.

Any personal finances must be kept totally separate from your Solo 401(k).

When you say you want to know more about a Solo 401(k) under a LLC, what do you mean by that?  A Solo 401(k) is not "under" anything, per se.  A Solo 401(k) does have to be sponsored by an employer - which is some form of for-profit business activity you are engaging in personally.  Your business that sponsors the Solo 401(k) could be a sole-proprietorship, LLC, Corporation, etc.

Ford Motor Company makes cars.  They have a 401(k) plan sponsored by the business that is a savings vehicle and employee benefit for the employees of Ford Motor Company.  Same concept here, just a simpler to manage plan designed for an owner-only business.

Brian Eastman · Answer

@Nicholas Patrick

The article you reference explains the how, but not the why.  Please be aware that the information you find on the internet is worth exactly what you pay for it.

The only reason you would setup a LLC under the umbrella of a Solo 401k is if the SoloK was significant in size and holds a fair amount of both risk and non-risk assets.  So, if you have a 401(k) with a property worth $200K and a stock portfolio or notes or some other non-liability creating assets worth $200K, you would want to shelter those non-risk assets from the real estate.  The 401(k) can directly invest into notes, stocks whatever.  Instead of having the Solo 401(k) directly hold title to the real estate, however, the Solo 401(k) would form a LLC and use that LLC to hold the real estate.  This puts the real estate on an island.

While not 100% impenetrable, the Solo 401(k) is separate from you and your business.  If the only thing you had in your SoloK was a single property held directly by the plan and someone sued, it would be a pretty extreme / rare scenario for that lawsuit to attach to you personally.  Good insurance is a simpler protection in most cases.

Michael Plaks · Answer

@Nicholas Patrick

One more thing. I wonder why @Dmitriy Fomichenko skipped over this one. :)

You plan to invest your retirement money in real estate, as well as your personal savings. Make sure you're not investing them into the SAME deals when you're personally involved - it would open a major can of worms known as "prohibited transactions."

More generally, your retirement money cannot be involved in anything you're personally involved in.

Dmitriy Fomichenko · Answer

Nicholas,

Congratulations on your decision to go into real estate full time! I see that you mixed two separate issues, which you should separate and look at each individually.

First, personal liability protection for the investments you make with your savings. There is a place to consider utilizing an LLC to hold your rentals, but that is not where you begin. First, you need to make sure that you have adequate amount of liability insurance coverage, at least $300,000. On top of that you may explore umbrella policy, which comes in increments of $1MM, and then you might want to utilize an LLC. You are not quite there yet... LLC's are often oversold, there is a place for an LLC, but keep in mind that the protection it provides 'limited', it is not bulletproof. There has been couple articles written on this topic here on BiggerPockets, search for that, really good info.

Second question is a Solo 401k. If you quit your job you can rollover previous employer 401k into Solo 401k (if you are eligible for it). Brian pretty much nailed the answer for you. Just setting up on LLC under your Solo 401k is not necessarily the answer, you have to look at the big picture. Do you really need one? If the liability risk it high with a certain investment you want to make perhaps you should consider alternative investment options. There are many options that come with very little liability risk, those may be better suited for the 401k.

James Fonteno · Answer

Great information guys! This helped me as well!! Thanks!!

Justin Windham · Answer

@Nicholas Patrick

The 401k is adopted by your business or self-employment activity. If you have an LLC setup for your business, then the LLC would adopt the plan. If you operate as a sole proprietor and don't have an LLC setup, you would adopt the plan as a sole proprietor.

Either way, the Solo 401k can be invested directly into assets, or an LLC can be setup to hold the 401k funds and investments would be made at the LLC level. This would be a separate LLC from any that you might create for your business activity.

Ana Garcia · Answer

Hi Nicholas, @Brian Eastman may be able to answer your question.

Best of luck!

-Ana

Carl Fischer · Answer

@Nicholas Patrick

Dependent on equity and the risk involved  you may want multiple LLCs or entities. You should setup rules as your wealth increases and maintain an asset protection plan. Adding ananymity is also encouraged at some point and reasons trusts are used. Taxes and insurance should also be added to the plan. You are on the right track. Maintaining accurate books is a must and at minimum a professional review should take place annually

George Blower · Answer

@Nicholas Patrick

Correct that your self-employed business LLC is separate from your solo 401k owned LLC.

Creditors that target your self-employed business structured LLC can try to go after your solo 401k LLC but they won't be successful since it is a separate LLC and the member is a solo 401k plan.

Nicholas Patrick · Answer

Hello @Brian Eastman,

Thank you for getting to my inquiry so quickly. I am pretty green regarding this topic, and looking for guidance. With my question, I am actually looking for the best way to protect my personal assets from lawsuits and such. However, I have money inside and outside of my 401k that i want to invest with

https://www.mysolo401k.net/the-process-of-investin...

This is an article i was reading that might better explain what I am trying to say. How I understand it is that money is funneled from the 401k into the LCC so you can invest with protection.

My biggest concern is protection my personal assets though.

Another question i have is, is the 401k attached to my personal name or to the company? Writing that, i guess that is what i should have asked in the first place. If there happens to be a lawsuit, am i personally on the hook for real estate that is inside the 401k?

Do I need to have two different LLCs?

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