Last Updated on January 30, 2020
When using the Rollover for Business Startup, or ROBS, structure for business funding, it’s important to know the facts. There are many ROBS myths out there that just aren’t true. It doesn’t matter if you are already using ROBS or are just researching, knowing how it works is just as crucial. In this article, we will briefly explain the ROBS structure and debunk the most popular myths surrounding the process.
What is ROBS?
ROBS is an IRS-approved structure that allows one to use retirement funds to start a business. The process is quite simple if you know what you are doing. First, you create a C Corporation. Then a 401(k) is setup for the business and a custodian is chosen. Your current retirement funds are then rolled over into the new 401(k). Lastly, the 401(k) plan purchases stock in the business. Now, your 401(k) can use the funds to operate the business.
Several features make the ROBS structure attractive for potential business owners:
- No need to go to a bank to get a loan. Therefore, no needless delays in getting the funds you need.
- You don’t have to take on debt. Startup businesses can get very expensive. With ROBS, you do have to dip into savings or take out a 2nd mortgage.
- Earn a salary. When using ROBS, you must be a bona fide employee, so you will make money with your new business.
- Diversity. ROBS will allow you to use your retirement funds in something you are passionate about. By starting a business, you better diversify your retirement savings.
Of course, all rules must be followed. However, don’t be fooled by the ROBS myths that are out there.
Now, let’s delve into several myths concerning the ROBS structure.
ROBS is a Scam
False! In fact, the ROBS structure is completely approved by the IRS. You must make sure that the entire structure adheres to all rules set forth by the IRS. In fact, it says directly on the IRS website that ROBS is “not considered an abusive tax avoidance transaction.” It’s simply a tax-advantageous way to fund your business.
ROBS is Actually a Loan
No, ROBS is not a loan from your retirement plan. Obviously, loans are paid back to where you take them from. This can be your 401(k) plan or from a financial institution. If utilizing ROBS, there is no loan to pay back. Further, you don’t have to pay interest back either. This makes ROBS an attractive business funding solution.
Receiving ROBS Funds Takes Forever
On the contrary, ROBS funding is usually faster than any other way to fund your startup. The whole process should take under one month. Many factors are taken into account for how fast the process will take. These include how fast you file the necessary paperwork, how long it takes your current plan provider to get you your retirement funds and, of course, how good your ROBS provider is.
You Must Use a C Corporation
This is in fact true. A C Corporation must be used with the ROBS structure. This is because Qualified Employer Securities are used to sell stock in the company. Other entities, such as S Corporations and LLCs do not offer this ability. However, an LLC can be created under the C Corp, which offers more protection.
You Cannot Be Diversified with ROBS
While it’s true if you use all your retirement funds to start a business, you will not be diversified. However, the same can be said if all your money is invested in the stock market. The savvy investor will only use part of his or her retirement funds to start a business. Besides, when you go into business for yourself, you are in control if you succeed or fail. This ROBS myth is busted!
You Cannot Buy a Franchise with ROBS
It may seem the ROBS structure is intended just for small businesses. However, even though a franchise is under a large corporation, each location is run by a different operator. Therefore, a franchise really is a small business. In fact, you can already own a franchise location and utilize ROBS to get more capital. There’s tons of opportunities when using ROBS.
Don’t let these ROBS myths deter you from starting your own business. When started and maintained properly, the ROBS structure is 100% legal and is a great way to fund your startup. If you have any questions about how ROBS works or are concerned about anything you might have read, please contact us @ 800.472.0646 today!