After you open a solo 401k that allows for investing in alternative investments such as private company shares or units (for example, C Corp., LLC and Limited Partnership), the next step is to process the private company investment. The following procedure covers the process of investing your Solo 401k plan in private companies from beginning to end.
Steps for Investing a Solo 401k Plan in Private Company Shares
Step 1: Obtain following forms from the investment company sponsor
Private Placement Memorandum/Offering Memorandum
Articles of Organization
Certificate from Secretary of State
Subscription Agreement/Stock Purchase Agreement
Accredited Investor Representations and Investor Questionnaire; and
Based on entity type:
Company By-Laws if investing Solo 401k in corporation shares
Operating Agreement if investing Solo 401k in LLC units
Partnership Agreement if investing Solo 401k in a partnership
Step 2: To help determine if the private company that the Solo 401k is investing in will be a good investment, consider obtaining the following documents:
Three to five years financial forecast
Step 3: Title and register the private company investment document offering:
In the name of the Solo 401k as the investor/owner;
List the Solo 401k employer identification number; and
Sign as the trustee of the Solo 401k.
Here is an example of how the Solo 401k plan’s investment percentage of ownership in the private company should be reflected:
If the name of the Solo 401k is Olive Tree Solo 401k Trust, then its equity interest in the private company would read as Olive Tree Solo 401k Trust FBO Ben Johnson, Trustee
Step 4: Fund the Solo 401k investment in the private company by writing a check from the Solo 401k plan’s checking account by making the check payable in the name of the investment firm. The check cannot be made payable to you as it would be deemed a taxable distribution, subject to possible early distribution penalties, instead of a Solo 401k investment.
Step 5: As trustee of the Solo 401k plan, you will hold all of the investment documents in connection with the private company investment, not the bank. Remember that the bank’s only roll in connection with the Solo 401k plan is to provide a checking account for the Solo 401k plan, not to administer the Solo 401k plan nor provide trustee services.
Step 6: It is your responsibility as the named trustee of the Solo 401k plan to deposit investment gains that result from the Solo 401k plan’s investment in the private company back into the Solo 401k plan’s bank account not your personal bank account as it would be considered a prohibited transaction.
The key to investing your Solo 401k plan in private company shares is to open a Solo 401k plan through a Solo 401k provider whose solo 401k plan documents allow for investing in alternative investments; therefore, make sure to first confirm your current or new solo 401k provider’s solo 401k plan documents allow for checkbook control solo 401k.
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