Yes, my best man at my wedding was named Rob and he is the type of guy who would treat you to dinner out, but that is not what I am about to talk about.
Lately I have been getting several calls from prospective clients who are looking to use a ROBS financing program to fund the start up costs of a new business. With the country still in semi lockdown from the COVID pandemic it is encouraging to see people follow their dreams and starting new businesses. Since this is a rare method to finance start up costs, I thought I would write a bit about it.
Rollover for Business Start-ups or “ROBS”, is a way to use funds locked up in your retirement accounts to fund a new business start-up. Often, I see ROBS programs used to fund new or the acquisition of franchises. Likely due to the franchise’s guidance to use ROBS to fund the business. Regardless most new business owners are generally flush with a stockpile of cash and most of their saved dollars are locked up in a retirement account. Accessing those funds directly could be costly due to the penalties for early withdrawal. Although the CARES act has made accessing those funds a bit easier than ever before, but about that in another post.
It seems most new business owners interested in using a ROBS have recently or are about to leave a current employer. They also have a sizeable 401(k) plan (greater than $100K) that they can use to fund a new business under a ROBS program. Although individuals who also have dollars in a traditional IRA account can also use those dollars in a ROBS financing program.
Using retirement dollars under a ROBS comes with some important restrictions and individuals must be well educated in the rules that apply to ROBS financing. Specifically, the Prohibited Transaction laws under both the Department of Treasury (IRS) and the Department of Labor. Therefore, it is so important to use not only use a reputable ROBS facilitator but also a CPA that is experienced with these types of financing arrangements. Due to the restrictions under the Prohibited Transaction laws the following are some highlights that potential ROBS users should be ready to address:
- Must us a Corporation to operate the business. S-Corp or LLC will not work.
- Must create a new 401(k) plan for Corporation to initially hold funds and become a shareholder of your Corporation. Admin fees with having a 401(k) plan
- File a form 1099-R to show the assets are rolled over into the ROBS plan. Often missed.
- Pay for an annual valuation of your Corporation
- Keep very accurate corporate minutes.
- Avoid any transaction that could be deemed to benefit you individual. This could include taking a salary.
The last point is something that comes as quite a shock to most potential clients when we discuss using ROBS programs. The rule you must consider is to not to enter any transaction that would deemed to move funds and value to you that would be to the detriment of the 401(k) plan. This doesn’t mean you cannot take salary; it just means the salary cannot create a scenario that devalues the Corporation and puts the 401(k) plan’s investment in jeopardy.
I have worked with a number of clients who have successfully used ROBS financing to get their businesses started. However, a simple Google search will show you that a large number of business who use ROBS financing fail. This is likely due to lack of business experience and not hiring the right people to advise them on the do and don’ts of ROBS financing. Do your research and get a good facilitator that is reputable and knowledgeable about ROBS financing. I recommend only one firm to my clients. Michael Stein at Guidant Financial.
If you have any additional questions or think that a ROBS financing is a program you would like to consider for your new business start-up then please contact me.
BERushCPA PS 