To invest with a Rollover for Business Start (ROBS), which is also a form of 401k business financing, is to use 401k/retirement money in order to get the initial funding for a new business endeavor with your own equity. It is recommended that you have at least $50,000 saved up in your retirement funds in order to make an investment with ROBS. Since ROBS uses your own money instead of getting a loan, there is no debt or monthly payments involved. This also means there is less overhead expenses required. With ROBS not being a loan, you don’t have to pay interest either. Your current debt will also not affect your eligibility to be able to use ROBS. Utilizing ROBS will not trigger a penalty for withdrawing money early. If more money than what is in your retirement funds is needed, you can use your retirement money as a down payment on a small business loan.
There are far fewer requirements to be able to use ROBS vs using a traditional bank loan. Bank loans even go as far as doing a background check for criminal history, education, and financial stability. ROBS is useful for people who don’t have a ton of money to invest up front or for people who don’t have an exceptionally high credit score to be able to get a regular bank loan. To obtain a bank loan, you would need a credit score of at least 680. If you qualify for a bank loan with a lower credit rating, you would have to pay a much higher interest rate. Since you are using your own money, no credit score is required. You also need to prove that your business is currently making money in order to get a regular bank loan. Unlike a bank loan, you don’t have to put your house or other majorly expensive assets up for collateral. ROBS is only for individual small businesses and not franchises.
With ROBS, Your business will be a C corporation, which is taxed at 21% (instead of 35%) regardless of revenue generated. Because of being a C corporation, this will not affect the business owner’s tax bracket during tax time. At tax time, with a C corporation, you can report as many operating losses for as many years as you need to without the IRS scrutinizing you. Also with being a C corporation, the retirement funds will be rolled over into the business venture’s retirement plan. You can invest more in yourself where the money goes back into your private corporation instead of having it go mostly to stocks and bonds that are traded publicly. As a private corporation, employees can earn salaries and the shareholders will only pay an individual income tax, making ROBS a tax avoidant investment strategy. Health insurance with C corporations can be used as a regular deduction; other benefits can be deducted as well such as delivery vehicles owned by the company, education costs, childcare expenses, and much more. Employees need to be able to have the option to participate in 401k plans from the business. The business needs to stay as a C corporation in order to reap the benefits of ROBS.
In order to maintain proper use of ROBS and not have to pay money back to someone else, you need to be sure you are following some specific guidelines. Aside from remaining a C corporation, the business owners need to make sure they pay themselves and not be silent investors. If you’re investing in ROBS, the investment needs to be for yourself and not for someone else. Your business needs to be a federally legal entity in order to use ROBS and must participate in federally legal operating practices, not just ones issued by your home state. For example, you are not allowed to invest in the marijuana industry because though it may be legal in your home state, it is not federally legal.
ROBS may have certain stipulations in order to be utilized properly, but in the end, can save you and your business a lot of money.
