Exploring ROBS: A Financing Option for Entrepreneurs

Professional working on a laptop with a digital overlay of various analytics and checklists displayed on the screenStarting a new business involves significant planning and capital. One financing method that potential business owners might consider is Rollovers for Business Startups (ROBS). This approach allows entrepreneurs to use their retirement funds to start or buy a business without incurring early withdrawal penalties or taxes. Here’s a look at how ROBS works and some considerations if you're thinking about using this method.

What is ROBS?

ROBS financing allows you to invest your existing retirement funds into your new business venture by rolling them over into a newly established 401(k) plan under a C Corporation that you will need to create. This process bypasses the typical penalties and taxes associated with early retirement fund withdrawals.

Steps Involved in ROBS:

  1. Incorporate as a C Corporation: Under current law, ROBS requires that your business be incorporated as a C Corporation due to specific IRS and Department of Labor regulations.
  2. Establish a New 401(k) Plan: Set up a retirement plan under your new corporation that will receive the rollover funds.
  3. Roll Over Your Retirement Funds: Transfer your existing retirement funds into the new corporate 401(k) plan.
  4. Purchase Corporate Stock: The funds in the new 401(k) can be used to buy stock in your corporation, thereby providing it with the necessary capital.
  5. Fund Your Business Operations: Use these funds for various business needs, such as equipment, salaries, or other operational expenses.

Benefits and Considerations

ROBS financing can be a powerful tool as it doesn’t incur debt or require monthly repayments. However, it’s crucial to understand the risks, particularly the potential for significant retirement savings loss if the business fails. This method also requires strict adherence to regulatory guidelines to avoid hefty penalties or fines.

Is ROBS the Right Choice?

Before deciding on using ROBS, consider:

  • Risk to Retirement Funds: You are investing your future security into a business venture, which carries inherent risks.
  • Complex Setup and Maintenance: The setup involves precise legal and tax work, and maintaining compliance can be complex.
  • Need for Professional Guidance: Due to the complexities and risks, consulting with financial and legal experts is advisable before proceeding.

Setting Up in Delaware

Delaware offers a favorable business climate due to its corporate-friendly laws and a well-established legal system, making it an attractive state for incorporation. Delaware is used almost exclusively by many corporate attorneys for their client’s start-up companies.

Harvard Business services, Inc. is the leading Delaware company formation specialist with more than 40 years’ experience in helping you form a Delaware company quickly, easily and at a modest cost. Even if you’re not using ROBS financing, you can start the business formation process on our website.

*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.

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