What is a ROBS?

The ROBS 401K small business financing transaction has become a very popular tool among entrepreneurs and business owners seeking financing for new or existing businesses over the last decade. Many business owners have been using their 401(k), IRA or other retirement funds to acquire existing businesses (including franchises) or to start-up new businesses. This financing arrangement is called a ROBS (an acronym used to abbreviate “Roll Over Business Start-up”).

What is the ROBS set-up process?

There are 5 basic steps to set-up a ROBS:

1. Set-up a C Corporation for the new business
2. Establish a retirement plan for current (if acquiring an existing business) or future employees
3. Transfer funds from your existing qualifying retirement plan into a retirement plan for the newly set-up C Corporation
4. This retirement plan that buys into the new business by purchasing stock
5. Officially, the funds of this stock purchase transaction become available to then operate the business

What are potential benefits of funding a business with a ROBS?

1. You have access to your retirement funds free of tax penalties
2. While traditional bank loans involve a credit check, there is no credit check required to set-up a ROBS and use your retirement funds
3. Investing funds from your retirement plan can reduce cash flow impact from traditional loans
4. Investing in yourself and your business can diversify your risks away from traditional, and potentially volatile, equity and debt investments
5. Less risk to personal assets because you are investing your own funds vs. using debt which often requires collateral

What are some potential downsides of funding a business with a ROBS?

1. If the business fails, you risk losing the retirement savings invested in the ROBS
2. Operating a C Corporation involves restrictions and limitations
3. Managing a ROBS includes recurring administrative duties and fees

Should you use a ROBS to fund your business? When you weigh the potential benefits and potential downsides, it becomes a personal decision. Any entrepreneurial venture involves risk. If you are comfortable with the risks, and your retirement funds provide the ability to move forward with your entrepreneurial dreams, you may decide that the ROBS transaction is the best way to move forward. If you have elected to move forward with a ROBS, or you have already moved forward, and you are looking for a CPA firm with significant experience working with business owners using a ROBS, reach out to Attaway Linville to discuss how our business tax service, our accounting/bookkeeping service and payroll service can support your entrepreneurial efforts and allow you to focus on growing your business.  Please contact us at 803-831-0263 or 404-607-8400.

ROBS-Related Services Offered By Attaway Linville:

Tax Return, Accounting/Bookkeeping, Payroll and Ongoing ROBS Compliance Support

Not all financial/tax/legal advisors have the experience needed to effectively guide business owners as they seek to implement, or even exit, a ROBS transaction. Why trust your financial wellbeing to a CPA or attorney unfamiliar with a ROBS? Attaway Linville has gained a national reputation for supporting business owners and can provide ROBS expertise in all phases of ROBS business development: start-up, ongoing compliance and exiting a ROBS entity. With significant experience working with ROBS, Attaway Linville clients can be confident that their tax returns and ongoing ROBS compliance support are handled promptly and professionally. In addition to tax return support, Attaway Linville routinely provides accounting/bookkeeping/QuickBooks and payroll support services to business owners using ROBS nationwide.

Business Valuations for ROBS

Attaway Linville provides low cost valuation services to many ROBS clients. Any shares in a ROBS-funded business that are bought or sold, must be bought or sold at “fair market value.” To determine the fair market value price per share, a valuation must be completed. Changes in equity of a ROBS that is not based upon the fair market value as of the transaction date can result in a prohibited transaction and potential unwanted attention from the IRS. Business valuations are also required for calculating a ROB’s shareholder’s RMD (required minimum distribution) and Attaway Linville can provide these valuations very quickly in accordance with AICPA Statement on Standards for Valuation Services.  

Helping ROBS Clients Avoid or Address Prohibitive Transactions

One of the bigger surprises a ROBS business owner may encounter is that certain business relationships and transactions that seem perfectly legitimate are actually prohibited transaction.  Legitimate business transactions with disallowed parties, as well as some transactions that create of a personal benefit to the shareholder, are considered “prohibitive transactions.” These transactions can result in large fines and can place the whole ROBS plan in jeopardy.

While corrective action is always required when prohibitive transactions occur, there may be different remedies for them. Attaway Linville’s experienced team of ROBS professionals can help you identify and avoid these transactions while providing reasonable solutions for when a prohibitive transaction occurs. Considering some of the complex issues associated with ROBS, any ROBs business owner not using a CPA with significant ROBS experience may be putting his/her retirement income at risk.

Exiting a ROBS

ROBS business owners are aware that someday they will exit their ROBS. Since their ROBS investment is designed to either create or supplement retirement income, deciding when to pull the trigger may be based upon the value in the business. The ROB’s owner may choose to wait until retirement years to cash out, or possibly cash in sooner. Attaway Linville can help you work through those details with the help of an experienced wealth manager.

Additionally, winding down the business isn’t as simple as no longer operating the business. With a ROBS, certain steps are necessary in order to successfully and efficiently wind down the business, terminate the 401k plan and return funds to the qualified plan. Attaway Linville can support the decision making surrounding the ROBS exit process.