Use Your IRA or 401(k) to Fund a Business : BORSA™

Some FAQs About the BORSA™: Why a C Corp?, and the Myth of "Double Taxation"

borsaplan@gmail.com (BORSA™ Team) — Mon, 15 Dec 2008 17:32:00 +0000

Some of the most frequently asked questions we get from clients are:

“Why do I have to establish a C Corporation to implement the BORSA™?”

Why can’t I establish an S Corporation, LLC (limited liability company), LP (limited partnership), or GP (general partnership) to implement the BORSA™?”

Won’t I pay double tax with a C Corporation?

The reason clients ask these questions is because they hope to minimize paperwork (tax filings) and enjoy the perceived “flow-through” or “pass-through” tax benefits of those other entities. As you will see below, that is not always the case.

Here’s why any entity other than a C Corporation won’t work for the BORSA™.

Consider the essence of the BORSA™ structure: a C Corporation adopts a 401(k) plan and the 401(k) participant chooses to self-direct his account to buy stock in the C Corporation. Thus, a 401(k) plan (for the benefit of its participant) becomes a shareholder of the C Corporation. Now consider this:

In order to function as a flow-through entity, an S Corporation must be owned by an individual(s) or by a qualified Subchapter S Trust. A 401(k) plan cannot be a shareholder in an S Corporation. http://www.irs.gov/pub/irs-pdf/i2553.pdf

LLC’s, LP’s, and GP’s are all capital-account based entities – there are no shareholders, and there is no stock to issue to the BORSA™’s 401(k) plan. Under section 408(e) of ERISA, the only “qualifying employer securities” that can be owned by a qualified plan like a 401(k) are:

Stock
Marketable obligations
Interest in publicly traded partnerships

Membership interests in an LLC and partnership interests in a non- publicly traded LP or GP do not meet the definitions of “qualifying employer securities”.

Regarding the paperwork concern:

C Corporations file tax Form 1120 annually with the IRS.
S Corporations file tax Form 1120S annually with the IRS.
LLC’s, LP’s, and GP’s all file tax Form 1065 annually with the IRS.

Although S Corp’s, LLC’s, LP’s, and GP’s do not pay income tax at the entity level – rather, they “pass through” their income gains or losses to their individual shareholders, members, or partners – they still have to file annual tax returns that delineate the “pass- through” amounts. There is no escape from the IRS’ paperwork requirements regardless of the entity selected.

Lastly, the concern over “double taxation” in a C Corporation:

You often hear the statement that C Corporation earnings are subject to “double taxation”. This may or may not be true if you own the C Corporation’s stock individually, depending on your circumstances and proper tax planning. It is definitely not true when the corporation is predominately owned by a tax exempt retirement plan like the BORSA™ plan.

The concerns about “double taxation” of profits stems from a C Corporation earning profits which are taxed at the corporate level,

Corporate Income Tax Rates: 2008

       Taxable income over     Not over      Tax rate

          $         0        $    50,000        15%

               50,000             75,000        25%

               75,000            100,000        34%

              100,000            335,000        39%

              335,000         10,000,000        34%

           10,000,000         15,000,000        35%

           15,000,000         18,333,333        38%

           18,333,333         ..........        35%

and then declaring a dividend to a taxable owner (i.e. an individual) of the after-tax profits, which are then taxed at the individual’s dividend tax rate (15% if your income tax bracket is >15%).

However, a retirement plan (the 401(k) in the BORSA™) never pays tax on its earnings, be they dividends, interest, or capital gains. Accordingly, a BORSA™ plan will never pay a “double tax” on corporate earnings. The individual participants will be taxed on retirement plan distributions when they receive them - but that may be 10 to 20 years, or more, in the future. If the value of your C Corporation’s stock in the 401(k) plan grows by 6% or more for 5 years, you will usually have more than offset the tax that will be due when retirement plan distributions are finally received – that is the power of tax-deferred compounding.

Another issue that is often forgotten is the additional tax cost of accumulating profits in a flow- through entity. In a flow-through entity, the profits will be taxed to the owner at their highest personal income tax bracket. The owner’s personal income tax bracket could be 30% or higher depending on their salary and other income. In their early years, most small businesses have to retain profits to service debt as well as finance growth. With a C Corporation you can accumulate $50,000 per year at the 15% corporate tax bracket rather than at the owner’s likely higher personal tax rate.

Moreover, the biggest expense of any entity is probably going to be your salary. The income you receive as a salary will be taxed at your same personal income tax rate, no matter what kind of entity pays it to you.

As CPA’s we work with our clients to legally minimize the tax implications of owning, operating, and selling a business. We have developed a number of strategies to assist our clients in funding, operating, and selling their businesses. Please let us know if you would like more information about these services.

DRDA's Principal Doug Dickey to Present Webinar on the BORSA™

borsaplan@gmail.com (BORSA™ Team) — Thu, 06 Nov 2008 16:38:00 +0000

DRDA, P.C. announces a free webinar to explain the BORSA™.

The webinar will be hosted by Douglas A. Dickey, CPA, a recognized industry authority on the structure. His presentation will last approximately twenty minutes, with time for Q&A afterwards. The webinar will be offered on the following dates and times.

Please chose one of the sessions and click the link to register:

November 13, 10:30 CT: https://www1.gotomeeting.com/register/349002988

November 20, 10:30 CT: : https://www1.gotomeeting.com/register/757050868

November 24, 10:3 CT: : https://www1.gotomeeting.com/register/340513067

SBA-Backed Loans Dry Up at Crucial Time for Businesses

borsaplan@gmail.com (BORSA™ Team) — Thu, 06 Nov 2008 06:08:00 +0000

http://online.wsj.com/article/SB122575609098795075.html

Lenders are demanding bigger equity injections now than they were just two months ago. Your retirement plan balances can be an ideal source of funds to get your loan approved.

What You Need to Know About Early Distributions

borsaplan@gmail.com (BORSA™ Team) — Fri, 24 Oct 2008 16:30:00 +0000

Instead of taking early distributions of your hard-earned dollars to fund the next stage of life as a business owner, why not explore the BORSA™ instead? The Business Owners Retirement Savings Account Plan, offered by DRDA, P.C., a CPA firm, is available to qualified individuals nationwide as an alternative source of funding for a start-up business or franchise. ...Read Full Article

Doug Dickey of DRDA, P.C. Speaks at Mid-America Lenders Conference in San Antonio

borsaplan@gmail.com (BORSA™ Team) — Fri, 24 Oct 2008 15:41:00 +0000

Doug Dickey recently gave a presentation titled "Working with Qualified Plan Rollovers-The Opportunity and The Issues" focusing on retiring Baby Boomers and the lack of retirement savings to pursue future goals. ...Read Full Article

Small Business Administration Denies Home Equity Line of Credit for Equity Injections

borsaplan@gmail.com (BORSA™ Team) — Fri, 24 Oct 2008 15:29:00 +0000

The Small Business Administration (SBA) is no longer accepting your home equity as a way to provide the down payment (equity injection) for your small business loan.
...Read Full Article

DRDA, P.C. Works With Lenders Using the BORSA™

borsaplan@gmail.com (BORSA™ Team) — Fri, 24 Oct 2008 15:21:00 +0000

As Wall Street continues to fluctuate lenders grow increasingly cautious, yet still look to increase their loan volume. The experts at DRDA, P.C. work closely with professionals in the lending industry to formulate a solid business plan so that money obtained through a BORSA™ or SBA loan is spent wisely. ....Read Full Article