There are three sources of equity for your out of home company: you; friends and family; accredited investors, and equity funds.  We’ll talk about each alternative in turn.  Today we talk about funding a out of home company yourself.

You

You need to be willing to invest in your out of home company. Ask yourself why anyone else would ever invest with you if you won’t invest in yourself. Warren Buffett would say you need to eat your own cooking. Nassim Taleb would say you need to have skin in the game.   The benefit of funding a company yourself is that you can do it fast and without needing any one’s permission.  You also retain complete control and can be fast and nimble.  Finally you can be as patient as you need to be in making decisions to invest for the highest long term gain.  The drawback is that you will be investing all your eggs in one basket – your out of home company.  You probably won’t have the luxury to be diversified until you sell your company.  Another drawback is that your company will probably have to grow slower if you depend entirely on yourself for funding.

Where to find the money?

How can you come up with funds to invest.  The first source of funds is setting aside a portion of your income.  Don’t eat out.  Drive an old car.  No fancy vacations.  Keep your salary modest and reinvest everything your can into growing your out of home company.  A second source of money is home equity.  If your house has home equity use it. It’s easy to access.  You have freedom over use of the funds.

Avoid this tax trap when saving

The first advice Billboard Insider gives to out of home entrepreneurs is to save all you can, but avoid IRA’s or 401(k)s.  IRS rules make it almost impossible to invest IRA or 401(k) proceeds into an out of home business that you control without paying substantial tax penalties. The IRS considers this self dealing and the tax penalties for self dealing are significant.  You will have a 10% early withdrawal penalty on the amount you take out of your IRA or 401(k) plus the money you withdraw from an IRA or 401(k) will be  taxed as current income.

Take this example.  Let’s assume that you are making $100,000 and you have $500,000 in an IRA that you want to use to start an out of home company.  The withdrawal will increase your taxable income from $100,000 to $600,000.  You will face an early withdrawal penalty of $50,000 plus you will pay an additional $175,000 in income taxes on the IRA withdrawal.  So your $500,000 nest egg will have shrunk to $275,000 once you invest it in your out of home company.  Ouch!

How have you funded your out of home company?  Take our poll below.  We’ll report the poll results in a future column.

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