Your Retirement Plan Can Be Used As Seed Capital For Your Business

Whereas banks are lending again after the collapse of the U.S. economy in 2008, many still face hurdles obtaining financing and/or investment capital for new and/or start up businesses which still stifles small business growth. Many banks and institutional lenders require the borrower meet the below listed requirements:

• Business must have been in business for 2+ years
• Guarantor must have perfect credit (700+ FICO)
• Strong D & B rating for business
• Strong Financial Statements
• Business Plan
• Personal and Business Income Tax Returns
• Personal and Business Bank Statements
• Adequate collateral assets to serve as security against the loan
• The ability to put down up to 30% towards loan amount

If you decide to raise capital via a Venture Capital or Angel Investor group or firm you must give up more than 50% equity stake and operating control of the business which may be OK for some but not for many.
The other problem many face is declining wages, lack of employment security or unemployment either due to lack of skills, education, disability, age, etc.. that limits and/or restricts their ability to be employed and/or increased income potential. There are many U.S. citizens whom posses marketable and specialized skills to offer to the public if they were able start their own businesses. However, the major obstacle is lack or loans and/or capital to get started.

Well, good new has arrived for those facing such challenges! The solution is a R.O.B.S. (Roll Over Business Start-Up) Plan. Such a structure allows you to use your retirement funds to invest in your new business and NOT be restricted from compensating yourself which is common under any other use of retirement funds to invest in a business as per IRC 4975. However, this structure is permissible as per IRS rules. The R.O.B.S. structure involves the establishment of a 401K Plan and a newly formed C-Corp. The funds from the 401K will fund the C-Corp in exchange for Private Stock Certificates in lieu of the investment funds from the 401K. This in essence is an investment in private stock but in this case it’s stock in the newly formed C-Corp in which the new business would operate. There are no time limits on the investment between the 401K and C-Corp. However, the account holder of the 401K is still subject to RMD’s (Requirement Minimum Distributions) at age 70.5 for all tax deferred retirement plans owned by the accountholder. Therefore it’s important that if you are age 65 or older when considering a R.O.B.S. plan to consult with your CPA or tax professional to ensure you have adequate funds in other retirement plans to meet your upcoming RMD requirement for all aggregate accounts

R.O.B.S. Funding as Down Payment –
The R.O.B.S. plan can also be used as a down payment to a business loan. While many lenders require the business to have been in existence for 2+ years, there are programs such as the SBA (Small Business Administration) that serve as sponsors of loans to small businesses. Their roles is to insure the loan the institutional lender will grant. This opens another opportunity to use retirement funds to get your new business funded by using these funds to represent a down payment or reserves up to 30% of the loan amount. This occurs when the C-Corp has been funds under the R.O.B.S. plan via the 401K. The funds are disbursed into the business bank account of the C-Corp whereas the bank will require proof and source of funds in the form of bank statements. So now you have the option and/or flexibility to use all or a portion of your retirement funds to fund your new business in conjunction with a business loan.

Buy/Flip & Private Money Lender Businesses -

You are able to use your retirement plan to fund your buy/flip real estate business and/or open your Private Money Loan business and compensate yourself. Normally, IRC 4975 prohibits the accountholder from receiving compensation. However, because of the structure of the R.O.B.S. Plan using a C-Corp structure you use this option to fund your new business without penalty. The transaction structure involves the establishment of a new C-Corp and a Solo 401K plan. Existing C-Corps are prohibited whereas business was conducted and the principal received compensation and/or immediate benefit. This structure is permissible because the Solo 401K plan is in essence investing in the C-Corp whereas the Solo 401K plan receives private stock certificates in lieu of the capital invested. There are no time restrictions on this investment transaction structure. However, you want to make sure the funds are returned to the retirement plan prior to the retirement plan accountholder turns age 70.5 which is when RMD's (Required Minimum Distributions) are due on all tax deferred retirement plans. In the event you have other retirement plans to satisfy the annual  RMD's you do not have to liquate the investment.

If you are unsure of what type of business type to start based on your background, education and skills you can consult with Business Consultant and/or Franchise Business Owner. There are many profitable businesses to consider through a franchise and most cases the documentation provided by the franchisor meets the requirements of most institutional lenders which means there are fewer documents to you have to worry about gathering and/or creating. In addition, it has been proven that many franchises have a better chance at obtaining financing from lenders because of the track record of other franchises sold with proven success records which is what banks are seeking as part of their underwriting and loan approval decision.