Small business owners face many challenges when it comes to financing their businesses, but one option that some may not have considered is using rollover funds to start or expand their businesses. In this blog, we’ll explore the option of using rollover funds to finance your small business, and how working with a CPA can help you make the best decision for your business.
What is a ROBS?
A ROBS, or Rollover for Business Startups, is a way for small business owners to use retirement funds to start or buy a business without incurring early withdrawal penalties or taxes. This option was created in 1974 as part of the Employee Retirement Income Security Act (ERISA) and allows business owners to use funds from their retirement accounts to finance their business.
To set up a ROBS, a business owner must first create a C Corporation and set up a qualified retirement plan, such as a 401(k) plan, for their business. The business owner can then roll over funds from their existing retirement account into the new plan and use those funds to purchase stock in the new corporation.
When is a ROBS the Right Choice?
While a ROBS can be a good option for some small business owners, it’s important to carefully consider the benefits and risks before deciding if it’s the right choice for you.
Benefits of ROBS:
- No early withdrawal penalties or taxes: With a ROBS, you can use your retirement funds without incurring early withdrawal penalties or taxes.
- No debt: Unlike traditional loans, a ROBS doesn’t involve taking on debt, which can be appealing for some business owners.
- Control: With a ROBS, you maintain control over your business and its finances.
Risks of ROBS:
- Complexity: Setting up a ROBS can be complex, and there are many rules and regulations to follow.
- Risk: There is some risk involved in using retirement funds to finance a business, as it can put your retirement savings at risk if the business fails.
- Potential penalties: If a ROBS isn’t set up correctly, there is the potential for the IRS to impose penalties.
Alternatives to ROBS:
While a ROBS can be a good option for some small business owners, it’s important to consider other financing options as well. Some alternatives to a ROBS include traditional loans, SBA loans, and crowdfunding.
IRS ROBS Project Findings
The IRS initiated a ROBS project in 2009 to determine compliance. Their findings stated “although there were some success stories, most ROBS businesses either failed or were on the road to failure with high rates of bankruptcy, liens, and corporate dissolutions.” You can learn more here, including rules requiring annual Form 5500 filing.
Consult a CPA for Small Business Before Deciding
Before deciding if a ROBS is the right choice for your small business, it’s important to consult with a CPA who specializes in small business financing. A good CPA can help you review your financial plan, evaluate all of your options, and make a fully informed decision. If you decide a ROBS is right, check out these provider options.
Working with Haworth & Company, Ltd.
If you’re a small business owner in Minnesota, Haworth & Company, Ltd. can help you with all of your accounting, tax, payroll, and consulting needs. We understand the unique challenges that small business owners face when it comes to financing their businesses, and we’re committed to providing personalized, high-quality service to each of our clients. Contact us today to learn more about how we can help your small business succeed.
