Are There Restrictions on How to Use ROBS Funding for Your Business?

Post Date: December 3, 2018

If you are considering using 401(k) or IRA plans to finance your new business, you know the power of financing your venture using your own hard-earned cash.

As seen in the recent post, So You Want to Use Your 401(k) to Start a Business, such funds are the key driver of the Rollover for Business Start-ups (ROBS) funding strategy. Such an approach lets entrepreneurs use their own retirement accounts to invest in the new company.

Are there restrictions on how to use ROBS funding for your business? Yes. For entrepreneurs interested in using the ROBS funding strategy, it is important to know the guidelines on how the funds can and cannot be used.

Gaining Access to Funds

To leverage existing retirement funds, you first need to establish your new business as a C corporation, which has specific tax and usage guidelines that allow for ROBS to occur.

Once the new company is created, you need to create a qualified retirement plan within the company. The company then issues stock that the retirement plan purchases.

The company takes the proceeds from the stock sale as cash that can be used to purchase or lease property, equipment, or machines, buy inventory, or hire employers.

The funding process is fast and gives you much-needed capital to use when you need it most. However, there are some restrictions regarding the capital that need to be considered.


Restrictions on ROBS Funds

One of the key stipulations of ROBS guidelines is that you must be an employee of the new business. You also need to pay yourself a reasonable salary. You can give yourself the title and salary you want but it is best to check with a trusted financial or legal adviser to make sure that the salary you choose is appropriate for the type of business you have established.

Part of the rationale behind the reasonable guideline is that with ROBS, you have a fiduciary responsibility to the retirement plan that has purchased stock in the company. You are now a stockholder and as such need to be mindful of the company’s financial performance, including the salaries paid.

Other restrictions related to ROBS include:

    • Personal Use of Property. The property you use for your business needs to be used only for your business. You and your family members are not allowed to use the property for personal matters. The Internal Revenue Service places a 15 percent tax on the lease, sale, or exchange of property for use by disqualified persons, which includes you, your spouse, and immediate family.
    • Promoter Fees. Advisors and brokers that help business owners raise money for a company are often paid a fee. However, IRS guidelines restrict paying fees to those “promoters” who also have a fiduciary interest in the company. Again, this is an area where a trusted advisor can ensure compliance.
    • Employees. When you have employees and have a retirement plan, the workers must have the right to invest in the retirement plan and in the same types of offerings as everyone else.

At Benetrends, we have been helping entrepreneurs with their financing needs for decades. To learn more about how Benetrends can help you and your company use existing retirement funds, schedule a consultation or download our Definitive Guide to 401(K)/ROBS Business Funding.

ROBS Funding Guide
Categories: Blog | ROBS

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