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October 2013

IRA is to startup funding as dynamite is to kindling

Joe Kristan is a CPA at Roth & Company P.C.

Equity is to startups like kindling is to a good campfire.  You might not get anything started without it. 

For many would-be entrepreneurs, retirement savings in an individual retirement account are the biggest potential source of startup funds. Yet getting money out of a traditional IRA triggers tax, and unless you are age 59 1/2 or older, a 10% early withdrawal penalty.

Some folks try to get around this problem by having the IRA itself be the equity investor. That can be a little like kindling a campfire with dynamite, as a Missouri man recently learned in Tax Court. 

The taxpayer, a Mr. Ellis, took about $320,000 from his 401(k) plan and rolled it into a self-directed IRA. He then had the IRA invest almost all of the funds in a new corporation (technically, an LLC that elected to be taxed as a corporation) in exchange for 98% ownership interest of the corporation. The corporation then went into business as a used car dealership, with the IRA owner as the general manager of the dealership.

The IRS said the result was a "prohibited transaction" that terminated the IRA, making the entire $320,000 of IRA assets immediately taxable. The Tax Court agreed:

In essence, Mr. Ellis formulated a plan in which he would use his retirement savings as startup capital for a used car business. Mr. Ellis would operate this business and use it as his primary source of income by paying himself compensation for his role in its day-to-day operation. Mr. Ellis effected this plan by establishing the used car business as an investment of his IRA, attempting to preserve the integrity of the IRA as a qualified retirement plan. However, this is precisely the kind of self-dealing that [the prohibited transaction rule] was enacted to prevent.

The results are hugely unpleasant: $163,123 in taxes and penalties.

The tax law is not generally friendly to retirement plans investing in active businesses.  There are cases where it can be done -- ESOPs, for example -- but it requires careful and well-advised planning, as the consequences of doing it wrong can be catastrophic. 

The tax laws are this way for a good reason: that money is supposed to be a nest egg, your cushion to land on when you stop working. Startups aren't exactly a widows-and-orphans kind of investment. If your retirement-funded start up goes bad, so do your retirement plans. They are at best a startup funding source of last-resort -- and if your business plan requires them, you might want to reconsider your business plan.

-Joe Kristan


Is your audience on 24/7?

TimemovementWhen I was growing up, my dad would get home from work around 6:00 pm.  He’d be carrying a briefcase and wearing a suit.  That was work dad. Once he walked in the door, he’d say hello and chat for a minute and then head upstairs to change.  When he came back downstairs in his jeans and casual shirt, he was home dad.  And for the most part, the two didn’t blend. 

There were no home computers back then and the only phone we owned had a really, really long cord so you might have a decent shot of having a private conversation if you stretched it as far as it would go.   Social norms dictated that my dad’s employees or boss didn’t call him at home unless there was a genuine emergency, so as a result, he rarely got work calls.

From what I could tell, that wasn’t unique to our house.  It was just how it was.

Contrast that with the results of a recent study done by Forbes (April 2012) that found that among senior decision makers the line between work and non-work time has all but been blurred away.

  • 52% say they receive information related to business decisions around-the-clock, including weekends.
  • 63% check work-related email every 1-2 hours during non-work hours.
  • 53% step away from dinner to deal with work-related issues.
  • 98% send work-related emails during the weekends or at night.

Only 3% of those surveyed said they did not interact with work-related email or have business conversations (via email, text or phone) while enjoying their vacation.

One fact that the study uncovered which gave me great hope -- there’s one period of time that most executives still protect and keep business from intruding.  Dinnertime with their families.

Interestingly, with execs staying connected throughout the workday, evening and weekends – they’re reporting that many business decisions are being made outside of business hours and outside the office.  59% of executives make 50% or more of their decisions at home or while traveling.

What I found most surprising about this study is that when asked how this uber connectivity made them feel, the executives overwhelmingly reacted in a positive way.  The word they used to describe how they felt about it was “empowered.”  They feel more in control and better prepared.

Today, professionals “toggle” between their personal and professional lives.   It’s not just a one-way street.  While they’re making business decisions from home, they’re also making personal decisions while at work.

What’s the takeaway from all of this for us, as marketers?

Work is no longer a nine to five proposition and we’ve got to factor that into how we communicate with our customers and prospects.   Today, work is more of a state of mind, rather than a state of time or place.

So timing your marketing efforts to coincide with the 9-5 workday is actually shortsighted. You are choosing the most crowded time for no real reason.  Your audience is connected and working pretty much all the time.

Even if you choose a less crowded time – you still have more competition than ever before.  Today, your target is not just doing one thing.   People have become master multitaskers.  We’re going to have to work harder to actually capture someone’s full attention.

This is another reason content marketing, social media and other “providing helpful information” marketing is rising to the top.  It also means that timely response has taken on a whole new meaning.  If they’re working on Saturday afternoon, do you think a reply by noon on Monday feels responsive?

You see – it’s not just “them” who is connected and working 24/7. It better be us too.


~ Drew McLellan, MMG's Top Dog



One man's trash is another man's treasure


Rob Smith is a principal at Architects Smith Metzger

A last effort after my house move was to organize my workbench. After sorting stuff I ended up with a box of coax, phone wire, speaker wire, plumber’s putty, and two white electrical switches. All of which I will never use.

I picked up the box and instinctively headed to the trash can. “Wait a minute” I said to myself, someone at the office certainly needs this stuff. The next day I offered my stuff to those much younger home owners, but alas, no one was interested. 

I headed to the office dumpster when someone mentioned Craig's List Des Moines. I took a picture and that evening at home posted a listing in the free category, “box of phone and speaker wires and more”. 

What happened next still amazes me. The next evening I checked to see if anyone was interested. To my delight I had 15 responses!!  They ranged from “I’ll take it” to asking the exact length of the coax or if there was an Ethernet cable in the box.

I decided to go with the first response who said they wanted the entire box. The time was 10:23 PM. Two hours after I made the post.

My stuff that I was going to throw away will have another life. I am now a believer that if you try, you can find a new home for your unwanted stuff.

Let me know interesting ways you have repurposed stuff rather than sending it to the landfill.

Send your thoughts to rsmith@smithmetzger.com

ESOP or employee-owned

Victor Aspengren is a vice president at Prairie Capital Advisors Inc.

A company has been transitioned to an employee stock ownership plan (ESOP). The company now has an ESOP, which is technically a defined contribution plan governed by ERISA. The challenge to the leaders in the company is: Do they promote the company as an ESOP or the fact they are employee owned?

In most ESOP companies, the terms ESOP and employee ownership are used freely to mean the same thing. This creates confusion to the employees. The simple fact is that the terms ESOP and employee ownership are not interchangeable. They are two distinctively different terms and how they are interpreted by employee owners is critical.

An ESOP is technically owned by the ESOP Trust, not the employees. Being an employee owner is tied to the culture of a company. Day to day decision making does not have to change at all. The only items where there is truly a vote are the following as related to IRC 409(e):

  • approval or disapproval of any corporate merger or consolidation
  • recapitalization

  • reclassification

  • liquidation

  • dissolution

  • sale of substantially all assets of a trade or business, or

  • such similar transaction as the Secretary may prescribe in regulations

Ultimately, even in these situations the ESOP trustee can override the vote based on their fiduciary role.

Companies that clearly differentiate the terms ESOP and employee owner have much stronger cultures. It requires a much higher level of training and education and requires a different type of leadership.  Employee ownership is about having input, being valued, and understanding the business through training and financial literacy.

The following is an example that illustrates this point: A new 25-year-old employee is hired. Is their interest focused on the ESOP or what it means to be an employee owner? The answer to this question will be directly linked to their tenure in the company. What's the right answer... what would the answer have been when you were 25?

-Victor Aspengren

Lessons learned from the Obamacare website launch

Katie Stocking is the owner of Happy Medium LLC.

In case you missed it, the new Healthcare.gov website was a spectacular failure.

Immediately after launch, the site was swarmed with hundreds of thousands of visitors. The traffic rendered the site useless for most people trying to enroll for health care, delivering a message like the one seen below:

(Sarah Kliff / Washington Post)

Other reports indicating the cost of the website have drawn more scrutiny to the buggy site: CGI Federal Inc., a Canadian-based company, won a $93 million contract to build the federal healthcare exchange.

Services like Facebook, Instagram, and Twitter have served millions of users before those companies even had that kind of funding. So how could such an expensive website fail so badly at launch time?

While the code to the site isn’t open-source and no one outside the Healthcare.gov IT Team knows for sure, a developer gave a few possible explanations for why the site has had trouble.

If you think about it, most web apps aren't immediately released to millions of users. Facebook and other huge services roll out new features over weeks and even months just so they can fix bugs along the way.

And in the case of Healthcare.gov, there are a ton of moving parts - grabbing data from other data hubs and sites to be able to determine whether the user is eligible in his or her state. If just one of those connections goes down or a server outside the realm of Healthcare.gov gets bogged down, it can seem like Healthcare.gov is at fault.

Does that make it OK for such an expensive and important site to fail from the start? Probably not. But it’s good to be aware of what happened, and you can take action for your own website and development projects to prevent similar failures.

What We Can Do

Obviously we don’t have huge traffic spikes to worry about, but we can prevent other bugs and site issues by doing plenty of testing beforehand. Make sure you spend quality time fine-tuning your website before sending it out to all your users.

This doesn’t mean NEVER launch your website – there will always be bugs – but just be conscious of the experience you’re giving your users. Remember, your website represents your brand and the type of company you are.

Finally, it’s important to remember that websites are living, breathing things. You shouldn’t just “launch it and leave it” – keep iterating, evaluating, and making changes based on what’s working and what’s not. Even with a limited budget, you can make a huge difference to your audience and your website users by continually improving things here and there – whether it be content or code.

Tweet me your thoughts at @interactivekate!


You can do anything you want, you just can't do everything you want

No matter what size your business is, there’s no substitute for focusing your time, energy and resources of what matters most.   

An important lesson I apply to my own business is summed up in the saying, “You can do anything you want; you just can’t do everything you want.”

Even some of the biggest names in retail have figured that out, though some of them figured it out too late. For small retailers, trying to do everything can be tempting but it’s a real recipe for trouble.

Too often, business owners think they are narrowing their opportunities for success by specializing in a specific area. In fact, just the opposite is true. The success of my business, the Heart of Iowa Market Place, depends not only on the niche we’ve captured but on letting people know we’re the leader in that niche.

Study your markets well. Look carefully at competitors and potential competitors. Select a niche where your business can thrive. And, tell your story with marketing that consistently reaches the right audience at the right times.

Be sure you're constantly focused on those things that make your business customer-focused, successful and profitable. If you do, you too will be able to accomplish anything you want.

How will you say thanks?


Drew McLellan is the Top Dog at McLellan Marketing Group

I just saw a meme on Facebook that said there were eight or nine Saturdays until Christmas. Yikes. It's hard to believe the holiday season is practically on top of us.

In the business world, the holiday season means client gift giving season. Most businesses start thinking about this honored tradition around December 1 -- when it's too late to get creative or do something special.

But it's only October 15th. You have a choice.  

Are you going to resort to the expected -- you know, a poinsetta, or a basket of fresh fruit or maybe some chocolates, or are you going to do something memorable that would stand out from all the other fruit baskets, chocolates and plants?

Don't get me wrong -- if you've been sending poinsettas for 20 years, you should keep doing it. Now, it's part of your brand's DNA and your client's expectations. There's nothing wrong with a more traditional gift, if it fits your brand. My point is -- actually give it some thought.

This isn't about the cost or the extravagence -- it's really about being memorable. What could you give your clients that would make them stop and take notice. What would capture the spirit of your relationship and the work you do together? What would tell them that you truly appreciate the opportunity to work with them?

The perfect gift could be anything from a charitable donation to a self-published book to anything in between. You'll know it when you think of it.

And that's my suggestion. Take the time to think of it.

~ Drew, MMG's Top Dog



Cordless vs. gas mower


Rob Smith is a principal at Architects Smith Metzger

After my big move a month ago it is time for the garage sale to rid ourselves of all the stuff we don’t need. One of the items might be a Black and Decker cordless mower I bought several years ago.

Why did I make the switch? I learned that mowing your yard accounted for as much air pollution as driving your car 20 miles. I also did not have to run to the gas station in the middle of mowing.

If I moved quickly, I could mow my small lot of less than 1/3 acre with one charge. If it was wet or I waited an extra day when it was growing like crazy, I could not make it on one charge and it was back to the garage for a 12 hour charge. I also had to make sure I mowed often enough so the grass did not get too high. Once I let it grow too tall, and even with a full charge, it would not cut the grass.

Now I have a slightly larger yard and cannot mow on a single charge; it seems I’m either mowing or charging.  So, I bought a cordless to be sustainable and it no longer does the job. Now that the end of season sales have come along, I’m off to buy a gas mower for next year. Maybe the best thing to do is pay someone to mow my lawn!

If you have a small yard and want a cordless mower give me a holler.


Social media and the government shutdown

Katie Stocking is the owner of Happy Medium LLC.

If you’ve been under a rock you might not have noticed that our government has shut down. If you haven’t been under a rock, you’ve probably not only noticed, but it’s all you’ve been listening to, seeing, and talking about. The last time this happened was 17 years ago and the only social media around then was playing the Oregon Trail with your friends actually sitting next to you and socializing.

Now with this shutdown in 2013, and our immediate access to information, we’re much more informed, empowered, and actually quite funny. So how has this impacted the shutdown?

Remember the Today Show Orange Room I was telling you about? They told their viewers to use the hashtag #DearCongress and have had a huge response. Some people tried to make light of the situation:


Others are taking this opportunity and these platforms to make a statement. If you look through any of the trending hashtags for this topic (#dearcongress, #governmentshutdown, #shutdown) you will see several people are committing to not voting for any incumbents in the next election. Members of our congress obviously can’t read each and every tweet – but the power of mass messaging is also very difficult to ignore, especially when our government is set up to have our people have the actual power with their votes. There have also been many comments about Congress still getting paid through this shutdown and other government employees not getting paid because of it. Regardless of where you stand, there are others out there for you to connect with and discuss.

Then, most government agencies even carried out their shutdowns to their social media platforms:


What do you think? Can all of this chatter on social media actually have an affect on members of congress and their decision-making? Tweet me and tell me your opinion at @interactivekate and join the conversation! 


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