By Vilma Betancourt-O’Day of Women Wrule
“We’re entering the Golden Age of Female Entrepreneurship—and it’ll be amazing—2016 will be the year in which the forces of entrepreneurialism and feminism converge. Together, they will drive a long-wave, Golden Age of Female Entrepreneurship, which will be a positive for all of us: positive and empowering for the women who make the leap, good for the economy, good for consumers and good for society.” Sallie Krawcheck, CEO and co-founder of Ellevest, has made it official: 2016 begins the Golden Age of Female Entrepreneurship!
Are you ready to start a new business? Have you considered buying a franchise?
Prior to signing the contract to purchase a franchise, there are many factors to consider if you plan to apply for Women-Owned or Small Business Certification in the future. These certifications may help increase your business revenue by selling your services and/or products to government entities and to the private sector, where procurement goals are set for Women/Minority/Veteran/Small Business Enterprises.
How will you pay for your franchise? Jane Stein, founder of Your Franchise Is Waiting, describes various options you may have when purchasing a franchise (Find the Money! 6 Ways to Finance Your Franchise). Using retirement funds is the route one businesswoman, Mary Smith, used to purchase her franchise. However, when she applied for the National Women Business Enterprise (WBE) and the local government Small Business Enterprise (SBE) Certifications, she was turned down. Why? She doesn’t own the business. Below Stein provides the most concise explanation I’ve found on the benefits of tapping into your retirement savings to start a business and who is the legal owner:
Rollovers as Business Startups (ROBS)
Another option is to use your retirement funds. This has become one of the most popular ways over the last few years to finance franchises. There are specialized financial companies that will set up the ability for you to invest your retirement funds into your business. This can be a very attractive way to go if you feel that your business will grow in value and that you may want to sell it in the future. The retirement account will own the business, and when you sell, the bulk of the capital gains will be sheltered inside the account. Best of all, ROBS allow you to access your retirement funds without incurring taxes, regardless of your age. And finally, this option allows you to start your new business completely debt free—you don’t have to pay back the money you withdrew unless you want to replenish your retirement savings. This account is now your business retirement plan, which you can fund or not fund going forward.
Yes, the retirement account (a legal business entity with its own tax identification number), not Mary, owns the franchise business. What defines ownership? In the State of North Carolina, the Statute reads:
§ 143-128.4. Historically underutilized business defined; statewide uniform certification: (a) As used in this Chapter, the term “historically underutilized business” means a business that meets all of the following conditions:
(1) At least fifty-one percent (51%) of the business is owned by one or more persons who are members of at least one of the groups set forth in subsection (b) of this section, or in the case of a corporation, at least fifty-one percent (51%) of the stock is owned by one or more persons who are members of at least one of the groups set forth in subsection (b) of this section.
(2) The management and daily business operations are controlled by one or more owners of the business who are members of at least one of the groups set forth in subsection (b) of this section.
To further clarify “ownership” as it relates to holding companies, the Small Business Administration’s Compliance Guide to the Women-Owned Small Business (WOSB) Program specifically states the following:
What if I own 100% of a holding company, which owns 100% of the small business? Is that small business 100% owned by a woman?
No. The small business is owned by another company and is not directly owned by a woman. Therefore, it would not be eligible for the program.
What if my company is 100% owned by an employee stock ownership plan and 51% of those employees are female? Does it qualify as a WOSB?
No. The small business is not directly owned at least 51% by a woman or women.
What is considered “unconditional ownership”? Below are examples from the same Compliance Guide:
What is meant by a business needing to be at least 51% unconditionally owned by one or more women? What does unconditional mean?
To be considered unconditional, the ownership must not be subject to any conditions, executory agreements, voting trusts or other arrangements that cause or potentially cause ownership benefits to go to another. The pledge or encumbrance of stock or other ownership interest as collateral, including seller-financed transactions, does not affect the unconditional nature of ownership if the terms follow normal commercial practices and the owner retains control absent violations of the terms
Can you provide examples of when you might find there is not unconditional ownership?
Example: An operating agreement provides that the company may be terminated in the event of any of four conditions: (1) the sale of all the company’s assets, (2) the unanimous agreement of the members, (3) the entry of a decree of judicial dissolution and (4) at the direction of one of the male members. Thus, only the male member possesses the unilateral ability to terminate the company. The fact that he may do so without the woman owner’s consent is a restriction on the woman’s ownership rights.
In addition to the ownership structure, the management of the company is also a deciding factor. Prior to purchasing a franchise, an attorney should review the contract to ensure that the woman or women are able to make decisions affecting the business and that there are no restrictions of control and/or authority. Margot Dorfman, CEO of the U.S. Women’s Chamber of Commerce, describes what direct control/management of a franchise means in this YouTube Video that discusses the WOSB Certification and Procurement Programs.
What about Mary and her Small Business Certifications? After I finished the initial due diligence, I recommended that she hire a business attorney familiar with the certification requirements who can help her to correct the many mistakes I found in her corporate documents. The corporate documents were not prepared by a private business attorney, but rather by the company who manages the retirement account. BIG MISTAKE. In addition, she discussed with her accountant the changes needed in her financial/corporate structure so that she can re-apply for certification, now as majority owner of her franchise. The paperwork is still in process.
If you are borrowing money from your IRA to start a new business, whether it’s a franchise or not, please speak to a qualified attorney and accountant before you borrow the money and file your corporate documents. Depending on the Certification, there may be implications to setting up a holding company if you plan to apply for Small Business Certifications in the future.
Vilma Betancourt-O’Day of Women Wrule is a Certified Business-2-Government Specialist and experienced Government Contractor on the Federal, State and Local Education platforms. She is a member of NAWBO-Charlotte, who serves on her chapter’s Public Policy Committee. She can be reached at [email protected].
This article is for general/educational purposes only and is not intended to be and should not be taken as legal, banking, accounting or business advice. Please consult with your business attorney, banker, accountant and/or business consultant to discuss your specific business matters.