Q: What is a BORSA™(Business Owner's Retirement Savings Account)?
A: The BORSA™ is a legal structure which allows you to fund the purchase or recapitalization of an existing business, franchise, business start-up, or business property using your holdings in a "qualified plan" - a 401(a) pension, profit sharing 401(k), 403(b), 457, or IRA rollover. Through the utilization of a BORSA™, these purchases can be accomplished without distributions, taxes, penalties, or the use of loans.
Q: If you can legally transfer money from any retirement account directly into a new or established business, then why hasn't my lawyer, CPA, or financial advisor informed me of this?
A: Most lawyers, CPA's and financial advisors are not knowledgeable about both ERISA (Employee Retirement Income Security Act) and IRC (Internal Revenue Code), the two bodies of law that govern the structure – we are. DRDA, PLLC has lectured on the sections of those laws that govern the use of 401(k)s to finance the purchase or startup of a small business.
Q: Can I pledge the assets of my retirement plan as collateral for a loan for a new business?
A: No. ERISA prohibits the "direct or indirect"....lending of money of other extension of credit between the plan and a party-in-interest." This means that any qualified retirement plan, be it a pension, profit sharing, ESOP, 403(b), 401(k), IRA rollover, etc., cannot be used as collateral for a loan without tax consequences. If the funds in your retirement plan are pledged, then the amount of the pledge is deemed to be a distribution and therefore subject to tax and penalties.
Q: What do you think about taking out a home equity loan to start a business?
A: Because of the limited borrowing provisions of 401(k) plans and the perceived tax consequences of a distribution, some entrepreneurs turn to the equity in their home to fund their business purchase or start up. While equity in your home is generally accessible under favorable rates and terms, a home equity loan to start a business has consequences that are not always fully thought through. When an entrepreneur borrows the equity from his home to provide equity to a business several things occur:
Q: Why must I establish a C-Corporation?
A: Why a C-Corporation, we are often asked why the BORSA™structure requires the use of a "C" corporation versus a LLP, LLC or "S" corporation. The answer is found in the law. Section 408(e) of ERISA allows for investment in "qualified employer securities". Congress defined "securities" as stock in a corporation. Only two types of for-profit corporations exist, an S-Corp and a C-Corp. In order to retain its flow-through provisions, an S-Corp can only be owned by an individual or a qualified subchapter S trust. Since a retirement plan is not an individual or a qualified subchapter S trust, it can not own stock in an S-Corp. Accordingly; only C-Corp stock is available for investment by your BORSA™ plan.
Learn more about how you can borrow money from yourself by using your own retirement account to fund your small business purchases or start up a new business. For more information visit our How It Works or Resources tabs and contact us with further questions or concerns at (281) 488-2022 today!
or connect with one of our trusted BORSAtm Advisors