It’s Business, And It’s Personal

Using a ROBS to fund a business

On Behalf of | Apr 27, 2017 | Buying & Selling Businesses |

North Carolina residents who are interested in buying a business may be unaware that they can use retirement funds to do so. The Rollover for Business Startups program allows a person to use money from a traditional retirement account, a 401(k) or an IRA to fund a business. However, there are disadvantages, and the risk of losing retirement savings is one of them.

In order to take advantage of ROBS, the investor must form a C corporation. This could also be a disadvantage since a sole proprietorship or limited liability company might be more advantageous. The person’s retirement accounts are then rolled into a new 401(k) plan that is created especially for the business. That money is used to purchase company stock, and this creates cash that can be invested in the business. Using retirement funding does mean owners could lose out on potential gains, and they must also pay significant fees. Two ROBS providers charge almost $5,000, and there is an additional monthly administrative fee. These fees cannot be paid from the ROBS proceeds. Completing a ROBS may also increase the IRS audit risk.

However, those fees might be offset by the fact that a person does not pay penalties or taxes for early withdrawal. Furthermore, funding with ROBS avoids debt.

Whether or not people decide to use a ROBS or some other way to fund a business, such as seeking venture capital or taking out a loan, they may want to work with an attorney. The process of finding funding for the purchase of a business can be complex, and whether the investor is an experienced business owner who has run a variety of companies or a first-time entrepreneur, an attorney may be helpful in preparing the applicable documents and explaining the tax consequences of each potential structure.