Starting a new business is a great adventure. As your own boss, you determine the course of the company--product and service offerings, promotional activities and annual revenue goals. You will also navigate through issues such as limited cash flow, disgruntled customers or delayed shipments. Before you even get started, you may face one of your greatest challenges: how to provide start-up capital. Take comfort in the fact that the American dream still exists, and the IRS allows you to fund it using your 401(k) without tax or penalty. Two options include direct purchase of your new company's stock or an indirect purchase through an Employee Stock Ownership Plan (ESOP). The second option may offer additional tax and estate planning benefits when it comes time to sell the business.
Invest in your company through a stock purchase using your 401(k) funds. By investing your 401(k) funds rather than withdrawing the money, you will avoid a 10 percent penalty from the IRS.
Form a corporation for your new business. Issue shares of stock to the owner investors.
A second option is to create an ESOP, which is a form of retirement plan that mainly invests in the employer. The new company's shares are deposited into the ESOP, and the original 401(k) funds are used to purchase the shares from there. This option allows the business owner to defer or eliminate capital gains tax when you are ready to sell the business.
Secure a team of advisers. Hire a firm specializing in helping small business owners invest their 401(k) plans into the new business or pull together your own team. You will need sound advice from an attorney, an accountant, a valuation expert and a securities broker.
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