What Is A Rollover Business Startup? | Frank Selden Law

What Is A Rollover Business Startup?

The acronym ROBS was created by the IRS in 2008  to refer to a business funding arrangement that existing promoters marketed under different names.

To read the IRS 2008 ROBS memo click here. A ROBS arrangement is simply a new, existing, or to be acquired corporation sponsoring a properly written 401K plan that allows, for at least a reasonable period of time, employees to invest qualified funds from the plan into the corporation for stock. A Rollover for Business Startup lets you transfer your retirement funds into a business-sponsored 401K plan, then invest in your business without paying income taxes or early withdrawal penalties.

A ROBS setup can be used to fund a new business, buy an existing business, or recapitalize an existing business. The business can be any legal business, as long as it meets the definition of an ‘operating company’. A ROBS is not a loan, so there’s no debt or interest to pay back, allowing you to retain more of what your business earns. Your qualified investment is the stock the plan owns in your company, which will increase or decrease in value depending on how well your company performs.

That straight forward. So why all of the fuss?

I started working with ROBS promoters and third party administrators in 2004. Over the years I noticed a couple of key areas where the ROBS promotion industry essentially set people up for potential issues. I kept helping people fix the same mistakes. The typical ROBS arrangement does NOT come included with any investment accounts for the Plan. While the ROBS promoters offer a recordkeeping service, they require the clients to become the trustee of the plan, which means the client is taking on all of the responsibility if anything goes wrong. We set up our ROBS arrangements with an investment account that includes hundreds of mutual funds in addition to corporate stock. You have the ability to direct your investments but not signing authority. This setup prevents prohibited accidental (or deliberate) prohibited transactions. More on ROBS mistakes in future blogs. 

Just like any other type of business financing a ROBS has pros and cons that should be carefully weighed before deciding if it’s right for you. I strongly recommend that you do NOT use this process if you simply want to buy yourself a paycheck. Take the distribution, it's cheaper than all of the taxes you will pay taking the same money in the form of wages through the corporation.

Through our ROBS setup company, 401k ROBS PROS, we help clients steer through the hurdles and decipher the rules with a goal of 100% correct, 100% of the time. If that interests you, download our ebook or schedule a phone consult.

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