Solo 401k for Investing in Startups

QUESTION:

I want to do a few investments in startups out of my solo 401K. What do I need to understand?

ANSWER:

Neither you nor your family may work for the business startups.

Also, if the business offers goods or services, it will trigger UBIT if the solo 401k investment is done as as an equity investment instead as promissory note investment. See the following:

If the investment is structured as equity (e.g. stock in a corporation, membership interest in an LLC, etc.) the investment may be subject to unrelated business income tax if (I) the entity is an active business (e.g. providing goods or services) and (ii) the entity is NOT taxed as a C Corporation. If investment is structured as debt there is no unrelated business income tax issue as long as it is TRUE debt (e.g. some debt can be converted to equity such as a convertible note). Please see the following links for more information:

Private Placement

UBIT