Q:

Subject: Benetrends

Hello Kerry,

I saw your article on Benetrends website regarding their Rainmaker plan. It looks great and I'm looking to do this. However, I'm a little concerned with how I could get usage of the money. I currently already run a franchise under a LLC and also work another job in the computer field. What I want to do is quit my job and focus full-time on my franchise. What I need the money in my 401K for is to survive on (working capital) during the first year of business. I've really already taken care of all the start up costs so I won't need too much investment there. I was wondering what the tax implications are with:

Investing the funds from the Rainmaker plan in to my LLC. Am I able to write a check to my LLC from my new C-Corp as an investment? Then the LLC can do what it wants with the money? Would the LLC have to pay taxes on this money?

Thank you if you are able to answer.

A:

While you really need to pursue this in more detail with the people at BeneTrends and your personal tax advisor, you need to be very clear on exactly what the Rainmaker, or similar, plan entails.

As you hopefully know, taking money out of your retirement account for personal use is subject to ordinary income taxes, plus early withdrawal penalties if you are under 59.5 years old.

Basically, the BeneTrends program allows your retirement account to invest some or all of its cash into capital stock in a corporation that you will operate. The money will be posted on the corp books as capital stock in the equity section of the corp balance sheet. This is not income to the corp.

As manager of the corp, you have a very strict fiduciary responsibility to protect and maximize the value of the investors' equity and must refrain from personal enrichment at the investor's detriment. In this case, your investor is your retirement account. This means that the money that is invested into your corp must only be used for prudent and reasonable business purposes. This can often include a reasonable amount of compensation for corp management.

You can check with the folks at BeneTrends to see if their governing documents include any restrictions or limits on how much compensation you are allowed to take for yourself. Likewise, there may be restrictions on the use of too much of the capital investment in corp investments, such as the LLC you mentioned.

If the LLC investment is allowed under the governing documents, it will not be income to the LLC. It will be posted to the member equity account for your corp on the LLC's books.

As with all tax matters, the burden of proving that you are doing everything properly lies with you. This means that you need to be extra prepared to defend any decisions you make as manger of the corp regarding the use of the funds against any possible IRS accusation of self-dealing or personal enrichment.

Good luck. I hope this helps give you some issues to discuss with your personal professional tax advisor and the BeneTrends people.

Kerry Kerstetter

Follow-Up:

Thank you Kerry. I am just trying to see if this is a feasible plan so I can spend 100% of my time building my new business.

I recently learned of another company providing a similar service in setting up, SDCooper Company in Huntington Beach, CA.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 7/06/2005 07:15:00 PM Send this post: