The Franchisee Q&A section on this blog will give potential franchisees like you the opportunity to ask any questions
you want answered relating to the franchise industry. View this week's Franchisee Q&A posted by a fellow franchisee blogger on establishing a 401(k) to purchase a franchise opportunity...Read the reply here and if you have a franchise question you would like answered, leave me a comment at the bottom of this blog post...
If you establish a 401(k) to purchase a franchise via company stock, do you have to allow employees to purchase company stock via their 401(k)s? Can one establish a 401(k) and then take out a loan against it for funding the business? Or is it too difficult to get the funds into the C Corp from the individual?
Blog Post: Franchise Financing – Using an IRA or Other Retirement Savings...
As a general rule, you are required to extend the offer to purchase company stock to any employee who is employed at the time of the offer
. However, if you are purchasing stock in a corporation that will finance the purchase of a new franchise, there may be no employees other than yourself and your spouse at the time of the offer, so it may not be an issue.
If you hire employees after the stock offering is completed, you will, however, be required to offer them participation in the 401(k) plan
; this only means that they will be eligible to donate a portion of their salary into this savings vehicle. You will not be required to do any company matching, etc., but will have the option to do so should you wish to.
If you are purchasing an existing franchise
from someone else, however, you are now dealing with some very complex federal securities laws and Internal Revenue Code requirements.
You may have to offer the stock – called “Qualified Employer Securities
” in this type of transaction – to existing employees, depending on how you structure the purchase. This is why it is very important to work with an experienced company or competent tax and ERISA attorney to facilitate this type of transaction
, regardless of the type of business you are purchasing.
Work with a qualified, experienced company to facilitate this stock transaction to make sure you are dealing with any securities requirements correctly.
As to your second question: For some people, establishing a 401(k) for their business then taking a loan out of that 401(k) plan can make sense. However, the law limits the amount of the loan to 50% of the employee’s balance
, or $50,000, whichever is smaller.
Consequently, you cannot raise nearly as much capital through a loan. In addition, since the term of such a 401(k) loan is typically five years, the monthly payments can be very high in comparison to other forms of financing.
You will also need to remain employed at this place of business
until the loan is paid off; otherwise, you will have to pay it in full with any interest upon termination of employment -- or face taxes and penalties on the unpaid balance.
To be clear, when investing retirement money into the stock of a business though a correctly structured plan, 100% of the retirement funds can be accessed
and, as it is not a loan, there is no monthly payment associated with the investment.
About Guidant Financial Group...
Guidant is the leading provider of self-directed IRA’s and business-funding solutions through IRAs and 401(k)s
. For more information on self-directed IRAs or Business financing please contact Guidant Financial Group
. You can contact Guidant by clicking on the links provided through there website or by visiting their profile on this website
If you have any franchise legal or financial based questions
you would like answered by the Guidant Financial Group team, please post your comments here…