Although the name ROBS includes the word Startup, the concept can be used to for existing business financing . Here’s how.
We Need a Corporation
The ROBS arrangement requires a corporation to sell stock to the Plan. This corporation pays its own taxes, is a “C” corp, not an “S” where the shareholders pay the business’ taxes. If you already have a C corp, you do not need to change your structure. Your corporation will need to create some board of director minutes to adopt the plan and make the corporate stock available to the plan participants.
If you do not have a C corp, we can use your existing structure in the following ways:
- if you have an S corp, the shareholders need to revoke the S election and notify the IRS
- if you have an LLC, the new corporation can purchase the LLC in an asset or equity purchase
- asset purchase typically results in dissolving the LLC and the corporation taking over operations at its level
- equity purchase makes the LLC subsidiary to the Corporation
- if you have a partnership, the partnership most likely needs to dissolve, its assets transferred to the corporation in exchange for stock
- if you have a sole proprietorship, your assets are transferred to the corporation for stock
Each of these paths requires an appropriate valuation of existing assets or equity. You may also need to file a tax return for the closing date of the existing entity. We leave that decision to you and your CPA / accountant.
The Corporation Sponsors a 401K Plan
Not just any 401K plan, but a plan that allows qualified employer securities (QES) as an investment choice. If all plans allowed this, you wouldn’t need me. However, most plans do not. The inclusion of QES in a plan creates additional reporting duties on the plan admin and trustee. Finance companies do not make any money on QES assets. I strongly recommend that you use a proper third party administrator (TPA), rather than a mere record-keeping service which thrusts you into more of a trustee role than most of my clients desire. My ROBS method includes connecting you with a leading TPA service who designs your plan and operates as your TPA. We help with the corporation’s plan adoption paperwork.
The 401K plan is sponsored for ALL of your employees, not just you. I believe your plan design should fit your business goals, including your goal to finance existing business operations. Most of the ROBS promoters offer a cookie cutter plan approach more for their benefit than yours (e.g. makes record-keeping much easier). Your corporation’s stock will become available to all employees with funds inside the plan for a period of time. If you are the only employee with funds in the plan who chooses to purchase company stock, that is allowed. However, you may not design a 401k plan to restrict benefits from others that you allow yourself.
Existing Business Financing
As an employee of the corporation with a 401K plan, you have a right to transfer qualified funds into the plan. You then choose to invest some or all of your funds into the corporation for stock, which then becomes your retirement plan asset.As with any stock, your investment will grow or shrink depending on how well your corporation succeeds.
The funds need to first be received by the plan. Some promoters force their clients to open an account in the name of the plan at a bank or finance company. While legal, most people are not aware of their ERISA fiduciary responsibilities as a signer on the account. You may prefer to work with a TPA that offers a financial account platform as part of their QES plan services.
The corporation then issues stock to the plan at the existing stock price or determined stock price for new companies. The plan owns the stock, and the corporation has cash in the bank. Voila, your existing business financing is complete!
Existing Business Financing to Retire debt, Grow or something else?
Some of our clients finance existing business operations to grow their company, others to retire debt. Both ideas work well with this concept. The SBA website contains excellent education on growing your business. When you inject your retirement money into your business, you are creating a stock investment, not a loan. The qualified money rules prohibit your plan, your IRA, or any other qualified account from loaning money to your business.
Just remember, you are sponsoring a 401K plan for all of your employees. Existing business financing with a ROBS strategy is a decision with more implications than your company’s finances. All current employees will have a right to purchase corporate stock for the same time period and at the same price you allow for yourself. It is imperative that you include, from the beginning, investment options other than your company stock. This is a primary area our service stands apart from most ROBS promoters who make you responsible for finding other investment options for your non-traditional 401K plan.
The IRS has a good website on plan sponsor responsibilities. Your TPA plan services and our legal setup services will help walk you through everything you need to know. Also see this article for more info on IRS issues.
Choosing the right TPA is paramount to transferring many of these responsibilities to their shoulders. This is not true of many ROBS promoter record-keeping services in which you are left responsible for the operations of the plan.
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