ROBS is an acronym for a relatively new financing arrangement known as a “rollover as business startup” being touted on the Internet and arranged by some investment firms.
Typically a ROBS works like this: You pay a fee to a plan sponsor to create a corporation, which sets up a profit sharing or 401(k) plan of its own. Then you roll funds from your own 401(k) plan into the newly created corporation’s plan. Your next step is to use the funds in the corporation’s plan to buy the stock of your new company, thereby providing working capital for your new business.
Sound too good to be true? It probably is. For one thing, profit sharing plans, while a legitimate way to reward employees by sharing profits from your business, must follow strict rules. These include filing annual tax returns and avoiding transactions that discriminate in favor of highly paid employees, including yourself. The IRS scrutinizes ROBS very closely to be sure all the rules are carefully followed.
When you’re looking for capital to set up a new venture, the idea of tax-free cash is appealing. But if the IRS determines that the deal is a prohibited transaction, you can be hit with penalties and risk losing your retirement money.
Please contact us before you enter into any complicated, questionable arrangement. We’re here to help you make the right choices for your business.
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