Constraints of using a Rollover Business Startup Strategy

A Rollover Business Startup (ROBS) forces a client to create their business with specific constraints. I recommend to clients to avoid a ROBS setup if you do not want these restraints. You want to feel awesome about getting up in the morning to engage your business. This should not feel like work. Most people do not mind these parameters, might not be their fist choice but they are what they are. Go ahead, you will be fine. However, if you read this list with any level of revulsion, then this concept is not for you. You might want to find another way to fund your company. If you want to discuss these issues, give me a call.

  • This strategy forces the use of a C corporation, which has its own federal and state reporting and filing requirements which are the responsibility of the entrepreneur.
  • The Corporation sponsors a 401(k) Plan for the benefit of ALL its employees, not just the entrepreneur. All employees of the corporation (and its subsidiaries or control group) must be extended rights under the Plan.
  • The Plan has numerous filing requirements. ROBS promoters typically set up the Plan with the entrepreneur as the Trustee and Administrator even if the entrepreneur has no clue what this means. A third-party administrator is usually hired to facilitate the Plan’s filing requirements, which creates an additional expense for the new business.
  • Any entrepreneur investing qualified funds into the Corporation first must be an employee of the Corporation (or a subsidiary or control group).
  • The corporation needs at least one shareholder other than the Plan who needs to own more than a “de minimus” level of equity, typically the entrepreneur.
  • The entrepreneur (or delegate) plays several roles in this process. Each have various federal and state rights and responsibilities which need to be upheld:
    • Shareholder
    • Board of Directors
    • Officer of the Corporation (President, Secretary, Treasurer) Employee
    • Plan Trustee
    • Plan Administrator
    • Plan participant
  • Corporate stock is typically restricted unless otherwise registered. As long as the Plan is a shareholder, the entrepreneur has a duty to ensure that any equity transactions for the corporation meet an “adequate consideration” rule. I will expand this idea into its own topic in the future. 
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