Setting up C Corp with IRA funds? Experience with Guidant Financial?
Parker, CO · Member since 2012 · 7 posts · 0 votes
Looking to possibly set up a C Corp and have our IRA buy shares so that we would have available capital for fix and flip opportunities. Does anyone have this arrangement set up or had in the past that can give me advice as to whether this is a "safe" method for utilizing IRA funds? Viability of this arrangement in the future with the IRS? Any successful exit strategies?
Also, if anyone has used Guidant Financial that would like to share their experiences with this company and their products, I would love to hear your input.
Thanks!
Given the expense, the necessity of 3rd party oversight, the nebulous nature of DOL interpretation, and the likelihood of inadvertent violation, why even discuss this? If you're a small investor, particularly one starting out, why not just roll to a 401K, take the participant loan and go from there. If you borrow the max ($50,000) at the rate of prime + 1% (4.25%) and amortize for the longest period (5 years), your payments will be $926.48 per month. As trustee of your own 401K, you can allow the first payment to be made 3 months from the making of the participant loan.
Is this enough money to start a bakery, open a restaurant, fund a manufacturing company? No, not at all. Is this enough money to place a bunch of options on houses then wholesale the options, buy some tax liens or re-lend to others at hard money rates? ALL DAY LONG!
Rather than beat the ROBS question to death, why not develop some strategies that would allow the beginning investor to get access to his money in the simplest fashion, then profit immediately from it.
IMHO, kill the idea of ROBS and do something with your funds that make you money, both inside and outside your 401K, immediately. I bought a duplex last summer for $9,000 which is making me $600 per month right now. If I had spent $6,000 of that on a ROBS program, I'd have $3,000 and a ROBS program.
As a side note: Someone stated that they don't like the lending restrictions inside a retirement plan. I own 6 duplexes and a 3-unit, and I'm 100% financed on five of them, the other I bought outright with profit from the first five. I don't see any restrictions at all.
So please, forget ROBS, and keep your money for profitable real estate transactions. JMHO
I used Guidant to set my SDIRA in 2006 and was happy with their service. I have subsequently had several consultations with the lawyer they set me up with and have been happy with his advise/services. Reading on BP though there may be cheaper companies to do the same work. I set up a LLC and didn't discuss a C corp with them and don't know how that would work.
I set up one of these with Guidanta couple years ago. Take a look at my second post in this thread:
Also, do an Internet search for "ROBS 401k" for more info...
I set one of these up for a non-real estate business entity and there were a couple things I wish I had considered. Guidant was extremely helpful in the process and I have no complaints with their service. The up front fee (which is negotiable) is steep, starts at $5k. Monthly maintenance fee is also steep, $100 - you're locked in for a year and as I understand their primary role is as plan record keeper. So your $6k out of pocket gets you a C Corp and ability to use retirement funds to buy stock in your C Corp.
The things I did not consider:
- You are an employee of your C Corp, so if you hire any employees you need to extend many of the same benefits to them that you receive, including participation in retirement plan
- If you hire employees you need to offer them the option to also use their existing retirement funds to purchase equity in your business
- Possible advantage of LLC over the C Corp
- Once you sign and speak with your assigned independent counsel they will advise you on the increased scrutiny you face with IRS, need to keep additional records and document corporate meetings, etc.
If I had a more complete understanding in advance I may not have gone this route. Because yours is a real estate entity, some of the above may not apply but it never hurts to consider all possibilities. To me, the biggest of which is if you never plan to hire employees, you don't need to worry about offering equity.
I guess I am confused as to how this is acceptable. If you are a stockholder or employee of the C Corp, doesn't the act of your IRA purchasing shares in that corp benefit you? Which is prohibited?
So what is the exit strategy anyway? You will eventually have to find an investor who will buy the IRA's shares or does the C-Corp do a buy back of the shares.
Thank you for the info. My internet search turned up mixed reviews - but mostly negative. Have you tried to obtain lender financing through your C Corp? We would still need a loan (looking for a guidance line with a local bank) to help fund purchase and construction costs. The banks that we have visited seem to be cautious of the IRA owned C Corp - as the concept is foreign to them.
You said that you set one up with Guidant a couple of years ago. Are you still with them? Are you still operating the C Corp that is 401k owned or have you found a successful exit?
Eric,
I was told that you could either buy back the shares all at once or over time. With each buy back, however, the business would need to be valuated - which is costly. To consider - if the business is profitable, the per share price will likely increase. The second option is to sell all holdings, cease business operations and shut down. I'm still trying to wrap my head around the exit strategy - that's why I'm curious if anyone has done it.
But this is not a public company, so the share price doesn't just rise when it is profitable. You would need to find a private investor to buy the shares and convince him of the value that you place on them.
Still not sure how this arrangement gets around the prohibited transactions rules of IRAs.
Ok, I have done some reading on ROBS and though no one really explains how it gets around the prohibited transaction question, the implications are:
1. If you are offering the opportunity to all in the corp, then it isn't for exclusive benefit of you. I didn't realize that the prohibitions had anything to do with exclusivity but ok.
2 And as J Scott indicated, it is still up for question as to whether this is ok with the IRS.
I look forward to hearing the details of Jscott's letter and his arrangement.
I see that 1 part of the equation is to have the C Corp create the 401K and have it buy the shares. I wonder if that is a requirement. To me that actually makes the deal look more shaky. I already have a 401K plan on my S Corp. If I created a new C Corp and had the S Corp buy shares in the C Corp. Though that is still "me" buying the shares, seems like the 1 small step removed might make the deal more legit to the IRS.
Thoughts?
If I'm reading Eric's question properly, that was an area Guidant cautioned me on. You can not benefit from the IRA funds. No family vacations, etc. But purchasing shares in a C Corp that you run with the intent to make a profit is a valid investment for the IRA, and indeed may be more prudent than mutual funds for example.
As far as exit strategy, as others have noted any sale of shares requires a valuation. Upon transfer of the business, the buyer would acquire shares from the retirement account at the valuation price. Similarly you could personally buy back the shares, increase your position in your C Corp and therefore back your retirement account out of the position.
[If I'm reading Eric's question properly, that was an area Guidant cautioned me on. You can not benefit from the IRA funds. No family vacations, etc. ]
Guidant's plan either recommended or required (don't remember which) that a salary be drawn. That salary is obviously going to benefit you. That's where I am hung up on this. I understand that the C Corp is a separate legal entity so the profits benefit the C Corp and the C Corp's shareholders. But the salary part? It screams personal benefit.
Also, if all of the profits made have to stay within the 401k plan, I don't see how I would earn enough capital to buy back the shares. I would have to sell or shut down.
I'm considering a Solo 401k as an alternative. I own my own business and even though a loan would only give me $50k to work with, I would be able to use my personal assets to supplement and not have the IRS cloud over my head.
Lisa,
You are required to be an employee of your C Corp and as such pay yourself a salary once the corporation is able to do so. I'm neither an attorney nor an expert but I believe the "personal benefit" reference is meant to prohibit you from using your retirement funds as a personal checkbook since you are still benefiting from the tax advantage in your retirement account.
The profits don't stay in the 401k plan, they would reside with the C Corp. If paid as a dividend then all shareholders, potentially you personally, your 401k and any other stakeholders would receive a cash payout. Maybe the C Corp could also increase your compensation or pay you a bonus based upon your executive performance....I'd check with a CPA on how to legally pull profit out.
Lisa,
I'll write more later when I'm not on my iPad, but ERISA laws allow for situations where employees of a company maintain significant ownership (sometimes full ownership) of the company via retirement assets. In those situations, employees are not just legally allowed to benefit from their active employment, they are required to (I.e., take a salary).
So, the idea of what Guidant is providing is certainly legal. The key is -- under one same ERISA provisions -- there are lots of other requirements that must be followed and met. For example, as mentioned above, all employees of e company must be afforded the benefit of ownership, not just the primary shareholders.
It's these smaller rules and regulations that many of the ROBS program providers may not be following, as well as some valuation requirements that aren't necessarily met by self-funding a company. The product itself is likely sound, it's more a question of the specific implementation you have, and that will be dependent on the provider, your counsel, your business practices, your business itself, etc.
Personally, my exit strategy was to have my c-corp dissolve and redeem the shares, which I rolled over into a self-directed IRA. I applied for a determination letter from the IRS, which took a year and just came through last month. But, it basically says that the Guidant product conformed to all laws and that my implementation conformed as well. In other words, I didn't break and laws or violate any IRS rules.
For what it's worth, Guidant didn't seem very happy with me going through the determination process -- they would have preferred that I never asked for verification from the IRS (this wasn't a necessary step but I wanted peace of mind). Don't know what they were scared of, but they tried to talk me out of it.
FWIW, I would never do it again and would never recommend the product to anyone, whether Guidant or another provider.
J Scott, Can you please tell me why you wouldn't recommend the product? It would better help me make a decision.
I am currently researching alternatives (solo 401k). I don't want to get stuck in research mode, but I don't want to be stuck in a bad situation either.
I don't recommend it because I'm not convinced that Guidant takes all the precautions necessary to ensure that you don't run afoul of IRS and DOL regulation, and I'm not sure that the DOL may not crack down harder at some point...and the potential penalty is losing all of your retirement funds plus another 10%.
I prefer to sleep well at night.
Thank you - I greatly appreciate your time and value your opinion.
Hi Lisa,
What are your goals for investment activity? Do you plan on making a few long term investments are will you be actively making multiple transactions annually?
You may just consider comparing the traditional SDIRA model to the C corp (solo k) or even checkbook IRA model.
Each has its advantages but most average investors don't necessarily need all the complexity of LLC/Corporation IRAs to accomplish their goals.
I will be actively making multiple transactions annually. I am investigating the Solo 401k - it looks like my best option at this point. To escape possible IRS scrutiny in the future, I would probably take the $50k loan and use that as capital. Unfortunately, this route does not make the total amount of my IRA available to me for my purposes, but I think the tradeoff is woth it.
To clarify, a ROBS (Rollover and Business Start-up) plan is designed to enable you to use your retirement plan for seed money to start a new business without having to pay a tax or penalties on the distribution. In effect, your retirement plan pays for start-up costs by buying all the stock in a new corporation. You are not a shareholder in this corporation, your retirement plan is. You are an employee. If you want a way to provide seed money for a new business, this is one way to do it.
To the degree you personally benefit from your C-corp as an employee (salary, retirement plan, health benefits, etc.) ROBS appears to be a way to benefit from your retirement funds since you are not technically accessing them. You’re using the capital contribution in your C-Corp from the sale of stock to your retirement plan. A thin distinction to be sure, but apparently legal. How you unwind this if you want is beyond me and I too am interested in J Scott's resolution with the IRS.
FYI, the IRS is reluctantly acquiescing here. They clearly state in this article, “ROBS plans, while not considered an abusive tax avoidance transaction, are questionable because they may solely benefit one individual – the individual who rolls over his or her existing retirement funds to the ROBS plan in a tax-free transaction.”
Another option to gain personal access, as Lisa Liberski noted, would be a $50k maximum loan from your 401K. You can do with this money as you wish but must pay it back fairly quickly. Unfortunately, $50k might not go very far if you’re flipping homes, as is Lisa’s goal.
On the other hand, if you want to invest the money tax deferred and with no access to any of it until retirement (i.e. you don’t have to live on it now), many types of self-directed retirement plans could work for you as have been beat to death on this board.
Jeff
The general idea of using retirement money to fund a business that you personally benefit from is clearly legal (ERISA is clear on this in sections 406, 407 and 408). The probably isn't with the law, but with the specific implementation. If the provider implements the plan correctly and if you as the administrator administer the plan correctly, there are no issues.
The problem is, the provider may not know enough about your specific business to determine if you're administering it correctly and most people aren't going to be familiar enough with ERISA statutes to know ourselves. All I know is that Guidant (and the attorney they hired for me) told me everything I was doing was fine, and they'd occasionally send me some documents that they said were very important and that I must keep them with my plan documents to avoid running afoul of the IRS.
I didn't feel like I had enough information or control to be making an informed decision about whether what I was doing was legal or not, so I erred on the side of caution.
Ultimately, the IRS officially determined that everything Guidant and I did was legal. That said, had I kept the business going longer, I may have done something stupid (or Guidant may have done something improper at some point in the future), and the IRS could have made a different determination.
I didn't want to wait around and find out...
I recently set one of these up. Prior to this, I was using a checkbook control IRA LLC, but was frustrated with the inability to use leverage when purchasing real estate. Regardless of what people tell you, finding a non-recourse loan is just about impossible. So, I did a ton of reading and spoke with people at Guidant, Benetrends, and SDCooper about their versions of the product. I should note that my day job is as a pension actuary so I am more familiar with ERISA than most people.
As far as risks, the IRS has clearly stated they're not a fan of these transactions, but that there isn't anything technically wrong with them (google Julianelle memo). They even did a compliance review where they examined many of these ROBS transactions and issued commentary on where people stepped afoul of the rules (didn't file 5500 or 1120, went out of business, didn't value the company). These aren't issues with the transaction itself, but with the operation of the plan or entity after the fact.
The major unidentified risk, as far as I can tell, is that the Department of Labor technically has jurisdiction over Prohibited Transactions--not the IRS. I don't believe they've said one way or the other how they feel about these. However, what tipped the scales for me was a statistic I heard about the percentage of new small businesses that are funded via the ROBS transaction. Up to 1/3, I believe. If the DOL comes down on these, a lot of folks are going to be screwed. I just don't see that happening in today's political environment, but I do see it as a risk.
Other complications with this structure revolve around operating a C-corp. You need to run payroll, file taxes (quarterly?), hold meetings and do any other number of things to stay compliant. It's likely you'll need to pay multiple someones to help you with these things. Build those costs into your decision. It's not an LLC.
Regarding exit strategies, the most likely scenario is a share repurchase. The Company then elects S-Corp status, and avoids the double taxation issue. Here's a link to a presentation that describes it:
http://sdcooper.com/ersop/PDF/Exit.pdf
I ended up using SDCooper to set mine up. Steve Cooper took the time to talk me through everything, answer questions and just seemed like the kind of person who would do the right thing if I got into trouble. It didn't hurt that their fees were lower, either.
Hope this is helpful.
Good info here. Thanks to all for sharing.
J Scott, you have mentioned penalties for violation a few times but my research doesn't show the same.
You indicate the penalty is loss of retirement fund plus 10% penalty.
#1 Everything I have read indicates that the penalty is supposed to reflect the amount of the violation. Penalties can range.
#2, the penalty you seem to be referring to is the loss of the IRA's status plus a 10% penalty. The funds don't get confiscated, they are considered to be "distributed" in full and are then taxed and penalized the 10%. Harsh but not losing all your funds as you seem to indicate.
Eric,
ERISA Section 502(c)(2) calls for prohibited transaction penalties up up to 100% of the amount involved in the prohibited transaction, which, for something like this, would be the amount of money in the plan. The 10% is an additional excise tax that plan sponsors may incur over and above the civil penalties.
Don't take my word for it...contact an ERiSA attorney and ask him.
Ok I see the section saying penalties can range from 5-100%. I think we are just looking at this from 2 different standpoints.
Everything I read indicates that the kind of penalties you are speaking about:
1. VERY rarely occur at all let alone the highest amounts. In some districts, there are zero cases of them occurring. One website indicates that 50 cases total were found with these penalties.
2. Most importantly, they are the result of actions taken by employees (members of the retirement plan) against the trustee because their plan was harmed by things like prohibited transactions, etc. As I and my wife are the only plan participants, this is not an issue for us. No one is going to complain to begin an investigation and Dept of Labor isn't going around looking at the minutiae of smaller, closely held plans like mine.
3. The cases I read where penalties were levied are all the result of very obvious infractions of fiduciary duty and not technicalities. They are usually levied as punishment for blatantly ignoring or delaying the investigation process and acting in obvious "bad faith" rather than for the actual violations of ERISA code.
4. From my reading the "amount involved" is not the total amount in the plan. It refers to the amount of loss/damage done to a plan participant's account by the trustees violations, in other words, the amount involved in the complaint filed by the employee.
If your plan includes many employees, your "risk" of running afoul of ERISA may seem higher to you than mine seems to me.
Hi Eric,
I had employees in my business, and that was both a good and bad thing. On the bad side, there were lots of rules around ensuring that they were given the opportunity to invest in the company through their retirement plans (not giving them this opportunity was a great way to run afoul of ERISA rules).
On the good side, having employees made it clear that that the business wasn't set up JUST for the benefit of my wife and myself, the two people who were employee-owners. Setting up a plan solely for the benefit of those funding the plan is also a violation of ERISA, though I'm not sure if having zero employees is a risk or not.
In terms of the potential penalties, as long as you are comfortable with the risks, that's all that matters. I didn't look into the actual numbers of people penalized, but even the risk of having my retirement funds taxed and distributed wasn't a risk I wanted to take -- let alone more severe penalties, regardless of how unlikely.
I've made a point not to suggest that what Guidant offers is illegal or that people shouldn't be using the product; I'm just trying to make it clear that I wasn't comfortable with the risks and the year I spent working with the IRS to receive my determination letter wasn't fun.