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Using retirement savings to finance a new business

On Behalf of | May 1, 2017 | Business Law |

Gathering the funds required to launch a new commercial venture is often challenging for Ohio entrepreneurs. Banks are generally reluctant to lend large sums when borrowers are unable to prove that they have a steady and reliable source of income, and most business startups struggle to turn a profit during their nascent stages. Loans backed by the Small Business Administration are sometimes available, but many entrepreneurs choose to fund new businesses by borrowing from friends or relatives or withdrawing the money needed from their retirement accounts.

Rollovers as Business Startups allow entrepreneurs to withdraw money from their 401(k) or IRA accounts to launch companies without paying taxes and early withdrawal penalties, but taking this path can have disastrous consequences when startup businesses fail. Companies funded in this way must be established as C corporations, and this may not be the preferred tax strategy for entrepreneurs. Taking advantage of a ROBS will also invite greater scrutiny from the IRS.

However, a ROBS may be one of the few sources of cash available to entrepreneurs who would struggle to qualify for a traditional loan and do not have assets that they can offer as collateral. Another benefit of utilizing retirement funds to start a business is that there are no monthly payments to make as a ROBS is not a loan. This can be particularly beneficial during the early years of a commercial venture when cash flows are limited and making ends meet can be difficult.

Attorneys with start-up company experience may encourage entrepreneurs to pursue their dreams, but they could also advise them to avoid taking unnecessary risks whenever possible. However, attorneys may suggest a more aggressive approach when business ideas are sound, opportunities have presented themselves and few alternatives are available.