This is part one of a two part article on ROBS setup issues.
1. ROBS Setup Issues – Corporation
Corporations can be set up in any state or US Territory. If the business is in a State other than the corporate filing, we also need to create a foreign registration in each State in each state in which the corporation is physically conducting business. I recommend to all of my clients that, lacking a specific reason to choose a different State for filing, select the State of your physical business address.
Corporations require shareholders, a board of directors, and officers. You may play all the roles in most states. A handful of States require the President and Secretary to be two different people. Even if you may play all of the roles in your State, consider having another person involved just in case. One of my first clients, about 12 years ago, played all of the roles in his corporation. Hired employees, created a solid, ongoing business, then passed away in an accident. No one had any authority to sign checks, etc. Just something to think about.
If we are capitalizing your existing business, we will need a valuation of your equity in that business. Most people create that valuation with their CPA or hire a business appraiser.
2. ROBS Setup Issues – Client as employee
You must be an employee of the corporation. Most of my clients do not create employment agreements with themselves. If you are going to hire other people, you will want to understand the rules in your State about employer responsibilities. I only provide this service for WA State as this is a State law issue.
The discussion of when and how much to pay yourself is good to discuss with your CPA. Bottom line is, pay yourself appropriately for the work you do as your company can afford it.
You may also need to file federal and state income tax reports, and in some States workman’s comp reports. If you hire people other than yourself, you will also want to become familiar with W-4 and I-9 forms. You can find W-4 forms and instructions at http://www.irs.gov/pub/irs-pdf/fw4.pdf and I-9 forms at uscis.gov/i-9.
3. ROBS Setup Issues – 401(k) Plan design
The plan is available to all employees as long as the plan exists. This does not mean that your corporate stock must exist as a plan investment option in perpetuity. Your board of directors is allowed to vote to close the stock offering after a reasonable period of time.
Your Plan design typically includes choices you may make about transfer and participation rights. Are these rights immediate or only after completing a certain number of hours / months of employment? The plan may grandfather in existing employees or you may chose not to do so.
Your plan design provides flexibility for vesting schedules and whether the corporation will match contributions. You may also decide whether you want to create a safe harbor design to minimize the need to conduct top heavy testing every year.
4. ROBS Setup Issues – EIN created
Your corporation is required to obtain an EIN. I handle this for my clients. You simply choose your tax year end and we do the rest.
If you have any questions about these issues please email, call, or set up a no cost phone consult using this link.
A ROBS looks easy on the surface. Hopefully these two posts give you a glimpse of sub-surface issues and why we create ROBS arrangements the way we do.