How to Use a 401(k) to Fund a Start Up Business

Most people don’t know that you can invest your 401(k) in a lot more than stocks, bonds and mutual funds. And one of those things happens to be investing your retirement money in your startup business. That’s where companies like IRA Financial Group and Guidant Financial come in — they are financial consulting firms that can help you use your 401(k) to finance the launch of your own business, without taking a taxable distribution.

There are two ways to fund a startup business using a 401(k), says Adam Bergman, a tax attorney and partner at IRA Financial Group. The first way is through a loan. A 401(k) plan allows to you to borrow up to $50,000, or 50 percent of your 401(k)’s total balance, whichever is less. A participant can use that loan for any purpose.

“I always ask my clients, ‘If all you need is $20,000 or $30,000 for your business, why don’t you arrange a loan from your 401(k)?’ says Bergman “It’s quicker, easier and cheaper, and since it is a loan, you are paying your plan back and not a bank or a credit card.”

But if you need more than $50,000, the second option is to use a strategy called Rollovers for Business Startups (or ROBS, for short). This is an IRS structure that allows a person to form a new C Corporation, adopt a 401(k) plan and use those retirement funds to invest in their startup business.

How can you use your retirement funds to start or recapitalize a business? This brief look at the Benetrends Rainmaker plan shows you how.

The ROBS structure is a risky proposition that is not for everyone. If you choose the C Corp solution, you want to make sure you are working with a tax attorney who can help you set up the structure properly to maintain Internal Revenue Service compliance.

Guidant Financial co-CEO Jeremy Ames says there are a number of legal requirements that have to be established before a person can invest their 401(k) funds under the ROBS structure:

1.  You have to structure your business as C Corporation and establish a corporate 401(k) retirement account. You can then rollover your outside retirement accounts into the new corporate plan. Your C Corporation now has the money to finance your business and other expenditures.

2.  Your company must be based on a legitimate business idea. The C Corporation cannot be a hobby. It has to be a viable business that’s designed to generate profits.

3. You have to meet the IRS requirements of a qualified plan. The IRS created prohibitive transaction rules to prevent an individual from rolling over the distribution and using the retirement funds to purchase personal assets.

Professional guidance is critical in setting up an IRS-compliant legal structure that you can use to invest retirement funds in your business. “First, and foremost, make sure you do your due diligence on the company you’re going to work with to help you do this,” advises Ames, “because at the end of the day, this is all about your business.”

Related articles

• IRA Financial Group Announces Customized Solo 401(k) Plan for Real… (prweb.com)
• Taxpayer Unwinding ROBS Transaction Allowed Extended Time to Roll Over Employer Distribution to IRA (ascpa.wordpress.com)

Financing Your Business With Crowd Funding

Being unable to find investors to finance your business endeavor is not an excuse anymore. Entrepreneurs are collecting money from crowd funding websites like Kickstarter and Chipin, which offer accessible and low- to no-cost entry platforms for funding projects, expanding businesses and launching startups.

Crowd funding, or crowd financing, is the collective effort of individuals who network and pool their resources, usually via the Internet, to support efforts initiated by other people or organizations. These communities are used to support a wide variety of activities, including disaster relief, citizen journalism, support of artists, and yes — startups and small businesses.

“These types of communities have made themselves quite valuable in today’s ‘Mom and Pop’ market,” says John Cerasani in his YFS Magazine article, 5 Ways to Start a Small Business Without Capital. “With a short profile video describing your business idea and fun perks for potential donors, entrepreneurs have a platform to raise funds without giving up control or equity in their ventures.”

Kickstarter, a crowd funding website for creative projects, has funded a diverse array of endeavors, ranging from indie films, music and comics to journalism, video games, and food-related projects. The platform also showcases entrepreneurs seeking financial support to help expand their small business.

Yancy Strickler, Co-Founder of KickStarter.com, tells how people are funding their entrepreneurial endeavors using his website.

In one case, San Francisco-based entrepreneurs Rachel and Greg Malsin launched Project Juice as a personal mission on Kickstarter to “nourish” the Bay Area community with their fresh, nutrient-dense fruit and vegetable juices. They successfully raised $15,579 (the original goal was $15,000) to help remodel their kitchen to meet the standards of city compliance, purchase industrial refrigeration units, launch a user-friendly website, and obtain license and permit fees.

Apparently, Kickstarter’s crowd funding platform is an idea whose time has come. According to its website, about $347 million has been raised for projects so far (though much less has been raised for successful projects).

ChipIn is another Web-based crowd funding service that simplifies the process of collecting money from groups of people. Once you create an event with ChipIn, the site will process and track all payments that contributors “chip in” via PayPal. You can also monitor events simply by logging into your account and viewing your dashboard.

As people donate to your event, you’ll be able to track the progress of your event using the ChipIn widget, which can be inserted on blogs, profiles, and websites.

Crowd funding is a financing option for prospective entrepreneurs who are hoping to develop an idea into a business, and those who might already have a business going but need financing to take it to the next level.

Here are five tips when considering crowd funding for your next project.

Related articles

• Crowd funding: A guide for SMEs (xlntelecom.co.uk)
• Crowd Funding Survey Defines Starting Point For Small Businesses (prweb.com)
• What Happens to Your Money When Kickstarter Fails? [VIDEO] (mashable.com)