Posted on Sep 30, 2011
Funding a New Franchise With Your 401k
For years now, droves of corporate refugees have been looking at franchising as a way out of the corporate jungle. Of course, franchising requires an investment and in the current economic climate, money isn't as easy to come by as it once was. But did you know you could tap your 401k to fund a new franchise business? To get the low-down on how this works, we went to the experts at DRDA, a CPA and business consulting firm that specializes in loan sourcing and alternative financing.
"Most people don't realize they can access qualified retirement funds to invest in their own business without paying taxes, penalties, or interest," says Doug Dickey, managing partner at DRDA. To help people do this, the firm has created a structured product called BORSA (business owner's retirement savings account).
Dickey says there are only four steps to making this work. "It really is a simple process," he says. Here are the four steps:
- Establish a C-Corporation.
- Adopt a plan.
- Roll money over from an existing plan into the new plan.
- Make a participant investment in the stock of your new corporation.
"When buying a franchise, you will establish some sort of protective entity to buy and operate that business," Dickey explains. "That's your C-Corporation. Then you take the majority of the cash from your retirement account to put equity into your company." To do that, Dickey says, the C-Corporation adopts a 401k profit sharing plan that needs to have two additional attributes. "The first attribute is different than most 401k plans because it allows for the receipt of rollover moneys from other qualified plans."
Once your retirement money is transferred into the newly adopted retirement plan, the second attribute kicks in that lets you invest in anything allowed by law. "Specifically," says Dickey, "we enable you to invest in qualifying employer securities." Basically that gives you the ability to buy stock in your employer-which is your own company now. The result: now you have cash inside your corporation that you control without having to pay any taxes, penalties, or interest on the money to get it there.
NEXT POST: Financing the Acquisition