A:         The BORSA is a legal structure which allows you to fund the purchase or recapitalization of an existing business,  franchise, business start-up, or business property using your holdings in a "qualified plan" - a 401(a) pension, profit sharing 401(k), 403(b), 457, or IRA rollover.  Through the utilization of a BORSA, these purchases can be accomplished without distributions, taxes, penalties, or the use of loans.

Q:         If you can legally transfer money from any retirement account directly into a new or established business, then why hasn’t my lawyer, CPA, or financial advisor informed me of this?

A:         Most lawyers, CPA’s and financial advisors are not knowledgeable about both ERISA (Employee Retirement Income Security Act) and IRC (Internal Revenue Code), the two bodies of law that govern the structure – we are. DRDA, P.C. is widely recognized as the expert authority on the sections of those laws that govern the use of 401(k)s to finance the purchase or startup of a business.

Q:         Can I pledge the assets of my retirement plan as collateral for a loan for a new business?

A:         No. ERISA prohibits the "direct or indirect"....lending of money of other extension of credit between the plan and a party-in-interest." This means that any qualified retirement plan, be it a pension, profit sharing, ESOP, 403(b), 401(k), IRA rollover, etc., cannot be used as collateral for a loan without tax consequences. If the funds in your retirement plan are pledged, then the amount of the pledge is deemed to be a distribution and therefore subject to tax and penalties.

Q:         What do you think about taking out a home equity loan to start a business?

A:         Because of the limited borrowing provisions of 401(k) plans and the perceived tax consequences of a distribution, some entrepreneurs turn to the equity in their home to fund their business purchase or start up.  While equity in your home is generally accessible under favorable rates and terms, a home equity loan to start a business has consequences that are not always fully thought through.  When an entrepreneur borrows the equity from his home to provide equity to a business several things occur:

• The entrepreneur puts their home at risk.  Often they have paid off their home and secured their place of living for the retirement years.  They now have a mortgage on the home that will require a portion of their retirement savings or earnings be used to service the mortgage in order to continue living in their home.

• By borrowing additional money, they have reduced the amount of money they can borrow from a bank to start or operate their business.  When a lender underwrites a loan application they must consider the amount of pre-existing debt service.  In essence they understand that the borrower must first pay for the loans they already have before they can pay for the new loan that they have requested.

• They have created a requirement for the business owner to withdraw money from the new business to service the home mortgage during the crucial first months and years of their business, thereby endangering the business during its most vulnerable time.

Q:         Why must I establish a C-Corporation?

A:         Why a C-Corporation, we are often asked why the BORSA structure requires the use of a "C" corporation versus a LLP, LLC or "S" corporation. The answer is found in the law. Section 408(e) of ERISA allows for investment in "qualified employer securities". Congress defined "securities" as stock in a corporation. Only two types of for-profit corporations exist, an S-Corp and a C-Corp.  In order to retain its flow-through provisions, an S-Corp can only be owned by an individual or a qualified subchapter S trust. Since a retirement plan is not an individual or a qualified subchapter S trust, it can not own stock in an S-Corp. Accordingly; only C-Corp stock is available for investment by your BORSA plan.