If you’re looking to start or scale a business, it’s important to have ample funding.
Leveraging your 401(k), IRA, or other retirement funds to start or scale a business is a valuable way to use your existing resources without saddling your venture with debt. But there are important do’s and don’ts to this common business practice known as ROBS (Rollovers as Business Startups) business funding. What are they? How can you follow the rules while still reaping all the benefits of ROBS plans?
Do’s for ROBS Business Funding
Unlike traditional business financing, ROBS funding isn’t a straightforward loan funding process; in fact, it’s not a loan. If used properly, it is an incredible resource for funding the business without loan repayments, taxes, or early withdrawal penalties. Here are a few important rules, or do’s, to follow:
- Work with a professional that is knowledgeable about ROBS funding. There are inherent complexities in using this type of funding that, if not followed, could result in penalties and fines.
- Be an active employee in your company. You must pay yourself a salary for the ROBS to stay legal. While ROBS rules don’t say what your title should be or the work you should do, you can’t be a passive investor in the business. You can’t use ROBS to buy a franchise for your spouse or child and not play an active operational role in the business.
- Invite employees to participate in the plan. Once a retirement plan is established through the ROBS process, all employees of the company must be allowed to participate, providing they meet the eligibility requirements.
Don’ts for ROBS Business Funding
While the ROBS strategy is a simple and legal process, there are very specific guidelines that must be followed to remain compliant with IRS and DOL regulations. Missteps that can cause issues are included in this list of don’ts:
- Don’t pay yourself more than a reasonable salary from your corporation for someone acting in the same capacity.
- Don’t rely on state laws to manage your ROBS funding. A ROBS strategy is governed by federal regulations with rules stemming from the Internal Revenue Service. In order to be IRS compliant, you must have a C-Corp business that offers goods or services for income, and the participants in your plan must be active business employees.
- Don’t fail to file your federal taxes and Form 5500 annually. You can accomplish this easily by working with a ROBS funding provider, who will prepare the Form 5500. You do, however, need to provide information for the work to be completed, so you must adhere to the timeline to ensure your Form 5500 is received by the deadline.
Benetrends specializes in helping businesses properly follow the do’s and don’ts of ROBS business funding. Schedule a consultation or download The Definitive Guide to 401(k)/ROBS Business Funding to learn more.