If you’re planning on starting a business, you may have heard of Robs. This is a lack of rollover as a business startup. This financial transaction allows you to fund your retirement savings to businesses tax-free.
That said, Robs should be pursued with caution as it can put a person’s retirement savings at risk. It is also a very complex transaction and the IRS is tax-free, so the IRS continues to pay attention to them.
If you are considering using ROBS, you should consult your accountant or financial advisor to see if this is the best way to fund your new business.
What is Rob?
Rob – Rollover as a business startup – Transactions are tax-free and moves money from retirement savings accounts to fund your business. According to the IRS, the ROBS plan uses these retirement assets to purchase new C Corporation shares, which will then be used as business funds.
Normally, early withdrawal of funds from a retirement account will involve penalties, but taxes and penalties are not related to ROBs. This is because you are not completely withdrawing your money, but you are involving it in a new business. ROBs are tax-free and liability-free, making them a more attractive option than traditional startup business loans and debt financing.
Eligibility requirements for ROBS Transactions
Meeting the eligibility requirements is a must for anyone looking to use ROB as a funding option for a business startup.
ROBS transactions can only occur after the establishment of a new company C. Establishing a company includes tasks such as appointing directors, submitting incorporation articles, developing the company’s articles of association, drafting shareholder agreements, and completing registrations with both the state and the IRS.
How ROBS Transactions Work
ROBS transactions are very complicated. According to the International Franchise Association, the procedures include:
1. Formulate a new company C, which is a corporate structure with shareholders.
2. Create a 401K ROBS retirement plan for that company.
3. As a business owner, you become an employee of Company C and become a beneficiary under a new retirement plan.
4. Roll funds from your existing retirement account to a new C Corp retirement plan.
5. Use the Retirement Fund to purchase shares at Company C.
6. As a business owner, you use the revenue from stock sales to fund your new business.
Continuous compliance requirements for ROBs
It does not halt when you use ROBS or establish C Corporation. Instead, continuous measures are needed to continue to comply with both federal and state laws.
The IRS must submit 5,500 forms each year. This form details the assets in the plan and the original stocks purchased. The IRS also must file corporate taxes annually.
Additionally, we are responsible for state-specific requirements related to Company C, such as submitting annual reports and maintaining registration. You can find a complete list of state requirements through the state’s Secretary of State’s office.
Pros and cons of ROBS fundraising
ROBS funding has both advantages and disadvantages. This should be reviewed to make sure you are doing something that is appropriate for your finances and business.
Rob’s alternative
Before completing your ROBS transaction, you should consider other ways to fund your business, such as an SBA loan. With many small business funding options available, something that doesn’t make retirement savings directly risk-free may work for you.
Business loan
Business loans are the most traditional way to fund a new business. You apply for one lump sum cash and repay the amount and interest on that loan over the loan term. Depending on your lender and your loan terms, there may be a secure or unsecured business loan.
Companies can also choose SBA loans that cater to both startups and established businesses. The most common SBA startup loan is the 7(a) loan, which is versatile for small and medium-sized businesses, covering needs such as working capital. SBA also offers community advantage loans, 504/CDC loans and microloans to startups, each with different loan amounts available.
Business Credit Card
A business credit card is like a personal credit card, but it is a business expense. You may be able to earn perks such as cashback, reward points, and introductory APR. You will see a lower limit than traditional business loans, but paying your monthly bill can avoid interest charges.
Credit business line
The business line of credit has a revolving borrowing amount. During the draw, you can draw anything that needs to be used, and then there is a repayment period.
You can find your business line with both secure and unsecured options. Because you pay interest only on what you use, a credit line is popular and makes it a less risky option than using retirement savings.
Crowdfunding
Crowdfunding allows people to donate to businesses in exchange for rewards and fairness. Crowdfunding usually goes through digital platforms such as Kickstarter and Indiegogo.
Personal loans for business
Like business loans, personal loans are provided as lump sums with interest paid on the length of the loan. Being responsible for personal loans, you could end up risking your credits and assets on behalf of your business. Personal loans may be easier to obtain than business loans, but some lenders may restrict their use of the fund.
Grants
Business grants are a great SME funding option as you don’t have to pay back the funds. That said, applications can be long and very competitive. Additionally, business grants are usually taxable.
Conclusion
Rob is a tax-free way to fund your business by transferring your own retirement funds to a new business. However, it is a complex process that can put your retirement period at risk and invite further scrutiny from the IRS. Finishing a ROBS transaction should ideally be done by a knowledgeable financial professional. The IRS monitors ROBS transactions and has specific filing requirements related to them.
