Start a Business NOW?

With so many people un- or under-employed it’s no wonder people who have always wanted to work for themselves are considering doing so now.  As bankruptcy lawyers, my partner and I perhaps have a skewed view of the landscape so here’s a good list of questions to ask yourself before venturing out, courtesy of Inc. magazine.

Dipping into the 401-k?

With bank financing so difficult to obtain, people are considering raiding their qualified retirement plans to seed new business ventures.  This article from Inc. magazine offers some basics, but of course you should seek  competent legal counsel before following the advice in any publication.

One place I can weigh in with certainty is on the question of what you give up with your 401-k, besides the cash itself.

In the event the business does not succeed and you consider filing for bankruptcy protection, you should know that monies in retirement accounts established pursuant to the Employee Retirement Income Security Act of 1974 (ERISA) as well as 401(k) accounts and 403(b) accounts cannot be touched by creditors. This is called “Exempt Property” and is no little matter, especially if you are anywhere near retirement age.

I wrote more on exempt property and 401-k, life insurance and IRAs as they relate to bankruptcy in earlier posts.

What if your business fails?

I have the greatest admiration for small business owners, and I understand their difficulties both as a bankruptcy attorney and as a small business owner myself.  I know how difficult it can be to fund a small business and have seen the traps that so many of our bankruptcy clients felt they had no choice but to fall into.  Guaranteeing business debt is always a concern.

Because small business owners generally have few financing options, they often mortgage their homes and personally guarantee the credit card debts of the company. Our clients often assume that the “business credit card” is a debt of the company, because the business name is embossed on the card. Not necessarily. The entity is liable only if it signed the credit agreement as the corporate entity. More often than not, the business name is on the card, but the credit agreement was signed and guaranteed by the owner (personally).

While no budding entrepreneur wants to consider failure, it’s prudent to do so if for no other reason than helping you map out a strategy to prevail against the odds.