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USTaxAdvising
USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1237
Experience:  US Taxation specialist.
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I want to use part of my 401K to be one of two investors in

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I want to use part of my 401K to be one of two investors in a USA (probably Ohio) holding company (we were thinking LLC) that will set up and own a Wholly Foreign Owned Enterprise in China. The WFOE is China will then sign a Master Franchise Agreement with a USA company and conduct business in China. I am living and working in China (but am a US citizen.) I will do some work for the WFOE and eventually draw a salary and bonus once we have postive cash flow. Can I do this? How best to do this?
Hello,

Thank you for using justanswer. I can assist you with your questions today.

If you want to use 401(k) money as business capital, you have to fulfill several qualifications. First, your business must be a corporation which most likely the Chinese company is. If it is not you can always file Form 8832 and elect corporate classification. Next it has to issue shares of stock that the 401(k) can buy, and it must provide a valuation for those shares on an annual basis. Second, the 401(k) must allow the purchase. If you set up the plan yourself, you can write this in to the plan document. If you use another employer's 401(k), the stock purchase should fit into the plan's investment policy. Most self-directed 401(k) plans have liberal policies, but verify the rules before you count on making a purchase. However, if you are investing in your own business, there are restrictions you must keep in mind in order to avoid triggering a premature distribution.You are allowed to own or control no more than 49% of the business. You, and members of your immediate family, fall into the Disqualified Persons category as far as the IRS is concerned. In other words, if you or members of your immediate family own more than 49% of the company, the IRS believes you are taking a premature distribution and will tax and penalize you accordingly. For IRS purposes, Disqualified Persons include you, your children, grandchildren, spouse, and parents. Siblings, aunts, uncles, cousins, and step relations are NOT considered.

So to answer your question yes you can do this, But you have to be very careful not to be a disqualified person. I would suggest engaging a legal attorney to review you proposed transactions to ensure everything is in line with what you intend to do and it all meets IRS requirements.

Best regards
USTaxAdvising and 3 other Tax Specialists are ready to help you
Customer: replied 4 years ago.
I read somewhere that the company that we set up would have to be a C corp - not a LLC or S Corp. Is that true or can we set up a LLC and become a S Corp later?

The company must be a corporation. It could be an LLC which is classified as a corporation, but it could not be an S-corp. Foreign companies cannot be S-corps.

 

Best,

Customer: replied 4 years ago.
Can I set up the LLC first and then have my 401K buy into it?