Major problem with using IRA funds for a start-up venture is the degree of risk the monies are subjected to. And you know it is risky. That's the (liability) problem. You know. . . and thus violates most interpretations of proper IRA investments.
If it's your own IRA, that is different from someone else's. You probably will not sue yourself but your spouse will get even. If it's other people's IRA, plan to be sued- Count On It- for all losses PLUS. Oh yes. You will lose the suit.
General Thought - Do the Due Diligence as if getting a (bank) loan. IF the venture still stands up then look at the private ('Accredited') investor route. Most important, pro forma the bank loan route and fully disclose everything to the investors including the fact that there is little chance of them getting the money back for a very long time if at all.
Thanks True for the tounge in cheek feedback. Getting sued by other investors won't be a problem because there won't be any.
The attorney I spoke to identified the risk that the IRS might declare the investment to be a prohibited transaction, and thereby an early withdrawal -- thereby making it taxable with penalities. Jail wasn't mentioned as a possible outcome. The research suggested by the attorney is (a) to determine if this is feasible and (b) if it is feasible, to determine how to structure the deal to prevent any negative outcomes.
I know you can buy real estate with an IRA, so it seems logical to me that you can invest in a business. I think the gray area is in investing in business that you control.
One of the companies that I spoke to is Mid Ohio Securities (www.midoh.com). I got the same story from another company (which I didn't bookmark -- try Google).
If I decide to pay the $ to get the professional opinion I'll post results.
Your other idea regarding the Private Investor is interesting, but I fear an investor would exert a degree of control I couldn't live with (I aleady have a boss, I don't want a new one). Plus they have a nasty habit of wanting an ROI on their investment…
The bank loan might turn out to be the best route... but I don't want to leave any stone unturned.