Solo 401k Loan Corporation | Rollover Business Startup | IRS ROBS

 QUESTION 1: I am interested in making a loan to a corporation from my solo 401k; and besides getting
the loan repaid, I would be getting 75% of the company stock.  Is that allowed?

ANSWER:  While the Solo 401k investment rules allow for loans (commonly referred to as a Solo 401k promissory note), the following solo 401k prohibited transaction restrictions apply if the solo 401k owner/trustee is a highly compensated employee (defined as earning 10% or more of the annual wages of an employer), officer, director (or has powers responsible to those of officers or directors), or own 10% or more of the corporation’s stock.  These same rules apply to other certain family members such as your spouse, your natural parents, your natural grandparents, your natural children, your solo 401k provider, anyone providing services to your solo 401k plan (e.g., your broker, accountant, attorney, etc. ), because they fall under the solo 401k disqualified person umbrella.  

QUESTION 2: Can the Solo 401k trust own 75% of the shares of a company?  

ANSWER: Provided the C-corporation has not previously issued shares and is thus issuing shares for the first time, you will not be receiving any personal form of benefit or compensation, a solo 401k may own up to 100% of the C-corporation or LLC, for example.

Put simply, you cannot personally benefit from the Solo 401k plan’s investment in the entity, nor can any disqualified parties as described above.  A common transaction where a solo 401k plan owns 100% of a C-corporation or LLC is one that will be investing in real estate. This is especially popular with an IRA and is referred to as a self-directed IRA LLC. This is usually done to greatly minimize IRA custodian transaction fees and involvement.

Possible Solution

Lastly, if you are looking to invest in your own operating business, but don’t have the necessary business funding funds, that will allow you to draw a salary and it will be setup as a C-corporation, you might be interested in pursuing a rollover as business startup (ROBS). This type of arrangement allows you to invest your solo 401k funds in a C-corporation. To learn more visit 401k small business financing.

Thank you,
Jason P. from Illinois