ROBS Legal Service Taking On The Promoters

This year I created a ROBS legal service. For twelve years, I offered legal advice for about Rollover Business Startups (ROBS) arrangements. ROBS allows 401K plan investment of one’s own into a Corporation to start a new business or add capital to an existing one. The arrangements, created by promotion companies, did not always set clients up for complete success. Interest from potential clients is more than I know how to handle with my existing solo practice. Two months ago, I created a webinar through LawProCLE to teach attorneys the basics of a ROBS legal practice. This idea might also work for a larger firm wanted to add this concept to their existing business or tax practice.

Constraints of using a ROBS

This strategy forces the use of a C corporation. Clients need to understand their federal and state reporting and filing requirements.

  • The Corporation sponsors the 401(k) Plan for the benefit of ALL its employees, not just the entrepreneur. All employees of the corporation (or its subsidiaries or control group) have 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. Too often, clients do not know what this means.
  • Any entrepreneur investing qualified funds into the Corporation first must be an employee of the Corporation.
  • The corporation needs at least one shareholder other than the Plan, typically the entrepreneur, who needs to own beyond a “de minimus” level of equity.
  • The entrepreneur (or delegate) plays several roles in this process. Each have various federal and state rights and responsibilities which need to be upheld.
  • While the Plan is a shareholder, the entrepreneur has a duty to ensure that any equity transactions for the corporation meet an “adequate consideration” standard.

ROBS Legal Service Components

A ROBS legal service involves the following sequential steps:

  • establish a new corporation,
  • hire the entrepreneur as an employee,
  • adopt a 401(k) plan that specifically permits investment of plan accounts into employer stock,
  • initiate a direct rollover or trustee-to-trustee transfer of retirement funds into the newly established plan,
  • direct the investment of the 401(k) plan account to purchase the corporation’s stock,
  • help client personally acquire corporate stock, and
  • use the proceeds from the sale of stock to purchase a business, fund an existing business or begin a new venture.

One Reason to use ROBS Funding

  • The investment into the corporation represents a reasonable expectation of positive return to the Plan.

Improper Client Objectives for ROBS Funding

  • Client needs a paycheck, which appears cheaper than a distribution (it isn’t)
  • Offer Plan participation to friends and family who are not legitimately employed by the corporation
  • “Save” client’s existing underwater company (generally doesn’t)

Top Three Mistakes in the Promoter Concept my ROBS legal service prevents

  • Funds transferred from the former custodian are deposited directly into a corporate account rather than into an account under control of the Plan
  • Client spends Plan funds directly on corporate expenses rather than first investing the funds into the corporation for stock
  • Client issues stock to an individual for the Plan investment rather than to the Plan for the benefit of the individual.

My decision to create ROBS as a legal product is not a William Wallace, Braveheart type stand against nefarious ROBS promoters. Promoters do a decent job. I do believe, though, that clients are better served with the professional responsibility of an attorney at their side that an unregulated promotion industry that cannot easily be held accountable for mistakes.

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