The Do’s and Don’ts of ROBS for Start-Up Businesses

The Do’s and Don’ts of ROBS for Start-Up Businesses

Constructing a solid business plan that’s airtight in its detail about the administration and success of your company is one of the essential parts of early success. But even with the best possible business strategy, it will be for nothing if you can’t guarantee the financial backing of a third party. Your company’s success hinges on convincing loan offices that you will succeed, a process that can hamper your progress.

Securing the necessary funds for your start-up business can be a difficult endeavor that can make or break your company. Going through the typical avenues of business financing, you can run into issues at every corner or agree to less-than-ideal terms, loan amounts, and interest rates, hurting your profitability.

Because of these challenges, many entrepreneurs turn to their Rollover Business Start-Ups (ROBS) to fund their company. But before you attempt to use ROBS, you must be aware of the do’s and don’ts of ROBS for start-up businesses.

What ROBS Are and What They Entail

ROBS are a type of financing option that enables start-up business owners to tap into their retirement funds to finance their business endeavor. It’s a small start-up business funding solution that differentiates itself from more traditional options in several ways, offering several benefits and challenges.

In terms of benefits, ROBS don’t put the business owner in debt, eliminating the financial stress of long-term repayments. Without these loans, start-ups don’t have to worry about increasing interest, missed payments, or late fees. The process to take out money from your 401k fund is relatively quick compared to other avenues, which can potentially take weeks to process.

For challenges, the most obvious is that the owner utilizes their own retirement fund with no guarantee they’ll see a return. While it’s not a gamble, it’s risky to dip into these savings accounts; in a worst-case scenario, the business may fail and put off their retirement for years longer as a result.

Invest Your Retirement To Benefit Your Business

Because you utilize your own retirement funding, it’s essential you invest that money in ways that will benefit the business at large. Every cent you spend due to your ROBS means one less cent towards your retirement, and you can’t necessarily get that money back after you spend it.

You must always spend your money wisely when investing in a business, but the pressure mounts when it’s your own money that your company uses. This significantly increases the stakes and the consequences of poor financial management; if you squander all the money, you’ll have nothing left to retire on. It takes decades to adequately fill a retirement fund, and you need to make sure that not a single penny goes to waste. If financial mismanagement happens, you’ll experience the consequences later in life.

You Should Remain As an Active Employee

When you start your business with your ROBS, it’s essential that you stay an active employee and take a salary. All business owners, if they have Qualified Employer Stocks, need to remain active workers of the company.

However, you need to ensure that the salary you pay yourself is not exceedingly high for your position. Paying yourself too much money may be a ROBS-Prohibited transaction and can result in legal action. At the very least, this kind of significant pay increase can trigger an audit from the IRS, and their findings can lead to legal consequences.

Offer Employees 401k Opportunities and Investment

For your other employees, you need to provide them with a retirement plan and the opportunity to invest in the company they work for. You must offer employees the right to purchase stocks in the company with their retirement money.

Do not set up barriers for employees to take part in the company’s stock or participate in a 401k plan. Just like with paying yourself too much money for your salary, this can trigger an investigation into your company and its work ethic.

Maintain Your Corporate Status

It may seem obvious, but you need to make sure your business remains active and not passive. Being a passive business can mean earning a profit through rental properties, investing, or limited partnerships. Active businesses maintain material goods and services that they provide to customers. ROBS require the company to remain active, it also stipulates that everything you do in terms of business are legal on the federal level.

For example, fireworks are illegal in Illinois, but you can purchase them in Wisconsin without significant problems. Because the legal status of fireworks is different between the two states, ROBS generally do not cover businesses that can run into legal complications. Your business must be able to legally operate in any state, following all federal regulations and guidelines.

Always Remember To File Legal and Financial Documentation

With your ROBS, like any other type of financial investment, you’re required to fill out the necessary tax paperwork every year in compliance with the IRS. One of the most notable forms you need to make sure you complete is form 5500; this form details the 401k plan investments, condition, and operation.

Your business’s third-party financial advisors cannot file the proper documentation for you; this is something you need to do within your business. Make it a point to file these forms at the end of every year, or else you may face fines and other financial and legal consequences from the IRS.

Know What It’ll Take for Financial Security

Being aware of the do’s and don’ts of ROBS for your small business means knowing how to safeguard your financials, both for you personally and your company. Improper investing, faulty documentation, or preventing employees from exercising their rights can all lead to financial woes and IRS investigations.

Know what the industry expects of you and how you can prevent any avoidable inconveniences as well as business-ruining practices. Spend and invest your retirement fund wisely; how you use your money can make or break your company, as well as securing your retirement or postponing it indefinitely.

The Do’s and Don’ts of ROBS for Start-Up Businesses