Can you invest your self directed IRA in an operating LLC?

There are several reasons to make self directed investments through an IRA LLC.

1. To Purchase Non-traditional Assets - The primary reason people form IRA LLCs is to use their IRA funds to make self directed investments in "non-traditional" assets selected by the IRA owner. Most IRA custodians limit the types of assets in which the IRA can invest to stocks, bonds, mutual funds, annuities, CDs and similar "traditional" investments. Traditional investments are numerous, but consist of only a fraction of the possible assets that people desire to purchase and hold for investment.
2. "Checkbook control" - The IRA owner can be the manager of a manager managed IRA LLC, but the IRA owner cannot be compensated for services or use his or her funds to pay any of the IRA LLC's expenses.
3. Asset Protection for the IRA Owner - The general rule of Arizona law is that the manager of an Arizona LLC is not liable for the debts or obligations of the LLC.
4. Asset Protection for Non-IRA Owners - The general rule of Arizona law is that the members (owners) of an Arizona LLC are not liable for the debts or obligations of the LLC. This is an especially important factor when the IRA LLC has members who are not IRAs.
5. To Pool Assets with Other Investors - When the cost to acquire an asset exceeds the funds available to a single investor, multiple investors may pool their funds to purchase the asset. The best way for multiple investors to pool assets is through an IRA limited liability company. The IRA and other investors contribute money to the IRA LLC that uses the funds to purchase the asset. An IRA LLC can have multiple members including more than one IRA, people and entities as long as the prohibited transaction rules are not violated.
6. To Create an Organizational & Management Structure When There are Multiple Members - Whenever there are multiple owners of a valuable asset, they need a set of rules and policies that will govern their common investment. The IRA LLC provides the governing structure, rules and policies applicable to how the joint owners will operate the company and deal with its assets. When you are a co-investor with others in a valuable asset, you should never rely on oral statements or agreements. You must have a written document that governs your arrangement. The Operating Agreement signed by all of the members is the foundational governing document.
7. When the Asset is "Complex" - If the asset to be purchased is "complex" then an IRA LLC is needed. For example, if you want to use self-directed IRA funds to purchase a ten unit apartment complex, you should form an IRA LLC to own and operate the apartments. Neither you nor your IRA custodian will want the IRA custodian to be involved in the day to day operations of the business such as paying utilities, depositing rent checks, signing leases, evicting tenants or any of the other common management tasks that arise from owning an apartment complex.