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401(k) funds to finance my own business?

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Florida999

Junior Member
What is the name of your state (only U.S. law)? Florida

Getting Financing or capital to purchase a small business is a real challenge. It seems that the odds are stacked against those of us who want to pursue our dream, as well as fuel the economic engine for growth and employment in the process.

I ran across the company that promises to do the following:

1. They will form a new business entity, a corporation, on my behalf.

2. They will then creates a 401(k) plan for the new business.

3. They will facilitates rolling up to 100% of my retirement funds from my existing account into the new 401(k) plan, without taking a taxable distribution.

4. Once the money is transferred to the new 401(k) plan, that plan will then make an investment into the corporation.

5. The corporation then purchases the business of its choice.


My Questions:


1. This sounds too simple. Am I just a skeptic or can this be done without paying a potentially hefty fee to this company for this service?

2. Is this something that is really ERISA compliant?

3. If the new 401(k) plan "invests" in the purchase of the new company, how does the plan recoup this investment down the road?

4. Besides the obvious risk of losing the entire investment what are some of the pros, cons or alternatives?

5. Assuming this is legal, what would be a reasonable fee for this type of service in Florida?What is the name of your state (only U.S. law)?
 


OHRoadwarrior

Senior Member
Do you really want to discover, 5 years down the road, the CEO of the company purchased, ran it into the ground? All the assets of the company were exhausted, paying the CEO's salary. Now your 401k shares are worthless. The fund manager and his brother, who just happened to be the CEO of the now defunct company, move to the Bahamas, while you and everyone else who invested go back to work at 70.
 

aldaron

Member
Every thing they're doing you can do your self or with the help of an attorney. What are the fees? What company will they invest your 401k in? Where do the fees come from? Who has control of these funds? Just my opinion but this sounds like a scam. If its a good business opportunity why aren't they using their 401ks to invest?
 

Florida999

Junior Member
The point is that I would be funneling my own money into a corporation that I would own, in order to purchase a existing business that I've done my due diligence on. I would control everything. The source of the funds would be my previous 401(k) instead of, for example, and SBA loan. I would be avoiding a taxable distribution that I would otherwise incur if I withdrew from my 401(k).
 

cbg

I'm a Northern Girl
Agree this sounds like a scam. This sounds like a really good way for the investors to end up owning your 401k and you owning nothing. I'd run very far the other direction.
 

LdiJ

Senior Member
What is the name of your state (only U.S. law)? Florida

Getting Financing or capital to purchase a small business is a real challenge. It seems that the odds are stacked against those of us who want to pursue our dream, as well as fuel the economic engine for growth and employment in the process.

I ran across the company that promises to do the following:

1. They will form a new business entity, a corporation, on my behalf.

2. They will then creates a 401(k) plan for the new business.

3. They will facilitates rolling up to 100% of my retirement funds from my existing account into the new 401(k) plan, without taking a taxable distribution.

4. Once the money is transferred to the new 401(k) plan, that plan will then make an investment into the corporation.

5. The corporation then purchases the business of its choice.


My Questions:


1. This sounds too simple. Am I just a skeptic or can this be done without paying a potentially hefty fee to this company for this service?

2. Is this something that is really ERISA compliant?

3. If the new 401(k) plan "invests" in the purchase of the new company, how does the plan recoup this investment down the road?

4. Besides the obvious risk of losing the entire investment what are some of the pros, cons or alternatives?

5. Assuming this is legal, what would be a reasonable fee for this type of service in Florida?What is the name of your state (only U.S. law)?
I think that everyone is misunderstanding you.

I believe that you are telling us that this company is merely going to help you set up a self directed 401k, which will then invest its money in a business that you will 100% own and control, with no outside investors.

I am not sure whether or not this is legal. I know that it is possible to have a self directed IRA, but I am unsure about a 401k and unsure about whether you can use a self directed account to invest in yourself.

Perhaps someone more familiar with self directed retirement accounts will add some further thoughts to this thread.
 

cbg

I'm a Northern Girl
It doesn't sound to me as if he will 100% own and control it. It sounds to me as if the investors will. Given that it appears that HIS funds will be used to make a purchase in the business of the investor's choice.

I would STRONGLY urge the poster to either bypass this "opportunity" altogether, or if he feels he MUST investigate it, to have both an attorney and a tax accountant review it THOROUGHLY before he does.
 

Florida999

Junior Member

cbg

I'm a Northern Girl
Just because you can find a company on the internet that appears to describe this process doesn't mean it's legitimate. But you're determined to go through with it despite anything I say. So have at it. I'll see you five years from now when you come back asking how you can sue the company for the funds you've lost.
 

anteater

Senior Member
The real question is ... can this be done by an attorney for probably 1/2 the fee I suspect these guys are charging
Probably not. Establishing and administering 401(k) plans is pretty specialized.

Guidant has been in the self-directed IRA business for awhile. I know that the IRS has been wary of these "invest in your own business" plans. Ask to see the determination letters that Guidant has received from the IRS.

I think the real question is how much you want to risk your retirement funds on your ability to run a business successfully. Only you can assess that.
 

Florida999

Junior Member
I appreciate everyone's responses. I assure you that I have no intention of investing or undertaking any venture without doing the proper due diligence and seeking the advice and services of professionals.

My question was really meant to explore the area of self-guided 401(k) and creating the proper legal entity or structure to use rollover 401(k) funds to raise capital to buy a business. The question of how much am I willing to risk has the same answer regardless of whether the funds come from my 401(k) or a bank account. It's tough out there to start a business when this country is in an anti-small business mood. This option of raising capital is a last resort if all other traditional paths don't deliver.

I am being mentored on my business plan. I will follow up in this thread with my finding as I gather the answers to the questions raised, such as determination letters, costs, and other details. Hopefully, my thoughts will inspire others to reply. I would still like to locate anyone who has financed a business in this manner.
 

aldaron

Member
OP theres 3 things you need to answer. 1st is who has control of the co regarding financial decisions, 2nd is who will ultimately own said co, and whats this co doing for you to give you value for your money. I think your skipping the fine print. READ IT with an attorney who's familiar with these transactions. Nothing is free and as I stated earlier if this is such a great deal why aren't these folks investing their own money instead of yours? Its like all these get rich quick realestate scams, they want to sell you the service but yet its not good enough for those who are selling it.
 

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