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Everything you need to know about the ROBS Solution.
The Rollover Business Startup solution, or ROBS, is the only legal structure one can use to purchase a business or franchise one will be personally involved in with retirement funds, without triggering a tax or penalty.
Pursuant to IRC 4975(d)(13), if a 401(k) plan purchases C Corporation stock, known as “qualifying employer” securities, the transaction would not trigger the prohibited transaction rules and the retirement funds can be used to fund the business.
The primary advantage of ROBS is that one can use his or her pre-tax retirement funds to start or finance a business or franchise he or she or a disqualified person will be personally involved in, without triggering the prohibited transaction rules or paying tax on the distribution.
A C Corporation is a legal entity in which the owners or shareholders are taxed separately from the entity. In other words, a C corporation has two layers of tax. C corporations offers its shareholders limited liability protection. Profits are currently taxed at 21%.
The 401(k) plan is the most popular type of defined contribution plan. A 401(k) plan, also known as a cash or deferred arrangement (CODA) is essentially a type of profit-sharing plan which allows all eligible employees to defer a portion of their compensation into the plan.
The two most important rules for using a ROBS solution to buy or finance a business is that a 401(k) plan and a C Corporation must be used in the transaction. Case law is clear that the use of an IRA or an LLC in a ROBS-like transaction can trigger the IRS prohibited transaction rules.
The IRS had reviewed the ROBS solution in 2008 and confirmed that the structure is legal but was subject to occasional abuse. Hence, it is vital to work with an experienced firm who can help you navigate the IRS establishment and compliance rules that are vital to keeping the structure in good compliance.
The two most tax efficient ways to use retirement funds to buy or finance a business that you or a disqualified person will be personally involved in are the Solo 401(k) plan loan feature and the ROBS solution.
The IRS has made it clear that complying with the annual IRS requirements applicable to the ROBS solution is imperative. Timely filing a C corporation tax return (Form 1120), as well as the annual 401(k) plan return – IRS Form 5500, is crucial.
The goal for any entrepreneur is building a successful business that can deliver a quality annual income as well as generate the potential for a large liquidity event. The main ways to exit a ROBS solution is for the tax efficient sale of the business assets or corporate stock.
Did You Know?
The SECURE Act makes it easier than ever for small businesses to start their own retirement plan. The annual tax credit for businesses offering a retirement plan has jumped to $5,000. Have more questions about ROBS? Visit our Rollover Business Startups Frequently Asked Questions page.