Published By Nikeya Williams at August 23, 2017
Finding the right source to fund your business is one of the most important parts of starting your business. As you’re looking for ways to generate more revenue, it can be tricky to find a consistent income when you first launch your business.
If you’re a firm believer in not racking up debt when you start your business, then taking a closer look at 401(k) could be beneficial for you. Taking out money from your 401(k) definitely is risky for sure, but if you have the business idea that will yield the dividends that you want, then it’s worth the risk.
Some business owners are finding that using their 401(k) is another way to fund their business without acquiring astronauticalamounts of debt. This idea of using your 401(k) to start your business might seem like a farfetched idea, but it’s possible to do. Before you start thinking that you’re going to take out $100,000 from your 401(k), you will need to make sure that you do your due diligence first. Here are some basic steps that you’ll want to cover before taking out money from your 401(k).
You don’t have to cash out: When you’re starting your business, you don’t have to cash out. You can use the process of creating a cooperation with a new 401(k) and roll the old 401(k) over into the new plan, so that way you can use your money as capital to fund your business.
Make sure that you establish a C cooperation before you create or buy your business: When you’re in the process of creating or buying your business, you want to make sure that you use a C corporation to create your business. You have to remember that an S corporationis limited with liability, and other structures don’t offer the necessary legal framework that you will need when starting your business.
You need a 401(k) plan in your business: You will need to explicitly provide the necessary information for stocks in the business to the qualified employer securities.
Roll over your existing 401(k): Make a plan to roll over your 401(k), IRA, or any other existing retirement assets into a new plan. This is important that you do this, especially if you’re planning on taking out your 401(k) to fund your business.
Treat the new business as an asset: You have to treat your new business as an asset that you want to invest your 401(k). You want to put as much as you want into your retirement assets, you can make a series of investments over time if you wish.
Invest wisely in your 401(k): Once the investment is made into the corporation, the 401(k) has become a shareholder. You’ll have the ability to use the cash for any ordinary or necessary business expense.
When you take money from your 401(k), there’s a huge risk involved. One of the main risks that you might face with financing your business with your 401(k) is that you could lose all your retirement money all at once. But don’t get scared, it’s just a risk that you will take when you use your 401(k) to fund your business. You’ll have this risk regardless of how much you capitalize on all your investments in your business, or what the industry that you’re investing into. However, if things go horribly with using your 401(k), just remember that you’re actually at a lower risk than getting a small business loan. You still have to pay for any loss in funds in your 401(k). Here’s the positive with using your 401(k), there are no credit implications and you don’t have to worry about losing your business, or your assets.
Moreover, if you decided to fund your business with your 401(k), you will have to make sure that there’s a large enough amount to make a meaningful investment, which means that you’re taking a significant portion. Taking out a large portion of your 401(k) means that your odds of success are good.
Taking money out of your 401(k) comes with a list of risks, but most of the decisions that you’ll make for your business will come with a series of risks. As a business owner, you have to be prepared for all the risks that you’re going to face in your business. Before you make a decision, make sure that you do all your research ensuring the growth and stability of your business.