What is a ROBS Corporation idea worth these days? You have been working on your idea. You know it is worth a million dollars. You bring $200,000 from your plan into the corporation and you, personally, add your $1M idea. May your corporation issue you $1M worth of stock for your idea? No.
ROBS Corporation Idea Worth $1M
Some of our client’s idea are worth a lot of money. Potentially. How do we know whether an idea is worth money? Sure, you have friends at the bar who say your idea is worth something. Can you take that idea to a major corporation and have them give you cash or stock for you undeveloped, unproven idea? Not likely. Your ROBS corporation is not going to issue stock to you for your idea either. I have several clients who insist on issuing stock to themselves for their amazing idea. I will not create a ROBS structure that issues stock for non-property. One reason is that the business world doesn’t either. See this article as an example. The other reasons is unique to ROBS setups: “adequate consideration” rules. If your stock issuance loses an adequate consideration test, the IRS can consider that a back door distribution, a shift of plan value into your pocket. This is rare, but if they do, your plan can be disqualified, the entire plan investment taxable to you as of the investment year, 10% premature distribution penalty if you are under 59 at the time, and false return penalties since you did not claim a distribution on your tax return.
A Silver Lining
Let’s say your plan owns 95% of the corporation, because it’s $100k is 95% of the capital. 5 years go by and you sell your corporation for $1M. The plan receives $950k. No capital gains tax. Growing tax deferred for your retirement. Perhaps at that point you transfer the funds to an IRA. Your plan’s investment turned a 850% return in 5 years. Where can you get that in the market?
IRC Section 1244 Test
Another way of looking at this concept is §1244 stock qualifications. The consideration paid by the shareholder must consist of money or other property, not services. Stock and other securities are not “other property” for this purpose. However, cancellation of indebtedness may be sufficiently valid consideration. See this article for more info on Section 1244 issues. Ideas and sweat equity do not count either.
What is a bright idea person supposed to do?
Create your ROBS corporation, bring your idea, your hard work, and let your Plan make most of the money.