Mayhall Fondren Blaize

Business and commercial law rules may help fund new startup

A Louisiana entrepreneur who wishes to start up a business must obtain financing to do it right. One option that exists where a bank loan is refused is to tap into one's 401(k). This is not necessarily recommended in many situations, and it carries the risk of losing a good chunk of the retirement fund if the business is not successful. In business and commercial law circles, however, there are some mitigating factors or strategies that may make it feasible in some cases to use the 401(k) as a springboard to starting a new business.

One possible option is to use the retirement account as collateral for a bank loan. Some 401(k) plans do not allow this, and it must be checked prior to going forward. The main benefit of this transaction would be that as one continues making the payments on the loan, more equity is gained back into the security, i.e., the retirement fund. Even if the business does not succeed, paying on the loan will eventually free up the retirement funds.

Strategically, using underperforming funds from a 401(k) to launch a business that will be making significantly more of a return on the dollar is a smart move. Of course, it is one that carries some uncertainty and therefore the wisdom of the decision will only be known in the future. However, using the funds for a startup business is not quite as risky as taking them out for some other purpose.

That is due to the possibility of setting up a Rollover for Business Startups (ROBS) plan in Louisiana and elsewhere. This is a complicated procedure that, once qualified, allows the business entrepreneur to roll over the retirement funds without paying withdrawal penalties or taxes. If the business becomes profitable, profits can be sent back into the original retirement fund. This requires some complex planning, however, and it is necessary to consult with a business and commercial law attorney with the possible additional assistance of one's CPA.

Source: smallbizdaily.com, "How to Use Your 401(k) to Buy a Business With Less Penalty", Bruce Hakutizwi, Jan. 31, 2018

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