how to fund your business with your retirement account (robs)
DESCRIPTION
With bank financing difficult to obtain, many entrepreneurs must rely on their personal finances to provide the initial capital to start or buy a business. One place which is frequently considered is the funds in a retirement plan (401(k), 403(b), or traditional IRA). This presentation will cover the pros and cons of this approach to funding a business, which is known as a Rollover For Business Startups, or ROBS for short. We will also cover the logistics of using a ROBS to fund your business, and the costs involved.TRANSCRIPT
The ultimate guide
for Business Startups
Rollover
What is a Rollover For Business Start-Up
(ROBS)
Using the funds in your retirement account. The retirement account gets shares in the company and the company gets money which can be used to finance its operations.
A ROBS enables you to purchase stock in your company
Because the stock in the company is privately owned, the transaction is more complicated than buying shares in a publicly traded company like Wells Fargo or Apple.
A ROBS enables you to purchase stock in your company
The prosOf a Rollover for Business Start-ups
Charge interest rates that are over 55% per year. As a ROBS is not a loan, there are no interest payments or repayment of principal due over any period.
Many providers of capital to small businesses
As a result, a company’s initial cash-flow does not have to be diverted to paying off the debt and interest.
Suggests that companies funded by ROBS’s have a much better survival rate than other startups, in part because they are not starving the business for funds in order to make debt payments.
David Nilssen, the
CEO and co-founder
of Guidant Financial
There are multiple benefits to using a ROBS versus taking a loan with a personal guarantee. A loan with a personal guarantee means that the business owner is guaranteeing the payment of the loan even if the business goes under.
If the business does poorly
If the loan is not paid back, the credit of the business owner can be destroyed. With a ROBS, the failure of the business does not impact the business owner’s credit.
If the business does poorly
The consOf a Rollover for Business Start-ups
Typically, the initial costs are around $5,000, and ongoing costs are around $1,500 per year for a company with 10 employees or less. Because of these fees, it generally doesn’t make financial sense to do a ROBS for amounts below $50,000, indicated Dallas Kerley of Benetrends.
ROBS – The Costs
How does a robs work?
1) The business owner establishes a C Corporation. 2) A valuation of the company is conducted to provide a stock price. As it’s typically a brand new company, the value of the company typically equals the initial capital invested.
3) A qualified retirement plan (for the company covering all employees) is established by the C Corporation. This can either be a profit sharing plan or a 401K plan. The retirement plan provides, as one of its options, the ability to buy stock in the company.
4) The business owner rolls over a qualified retirement account such as a 401(k), traditional IRA, or 403(b) into the company’s retirement program. 5) The business owner elects to purchase company stock with some or all of his or her retirement account with the company.
Commonly Asked Questions about ROBS
Yes, it must be a C Corporation.
Does it have to be a C Corporation or can it be an LLC, partnership, or S Corporation?
To be specific, a 401(k) is a profit sharing plan with a CODA. Under a 401(k) arrangement, the employee has the option of putting some portion of his or her salary into the plan on a tax deferred basis.
What is the difference between a profit sharing plan and a 401K plan?
A profit sharing plan which is not a 401(k) can be easier to set-up and administer. The drawback is that only the employer can contribute to a stand alone profit sharing plan.
What is the difference between a profit sharing plan and a 401K plan?
Yes, the legal requirement is that the employer stock has to be made “effectively available” to the employees in the same way it is available to the owners. Such a purchase of employer stock can only be made with retirement funds, such as retirement monies rolled over from another retirement plan.
Do employees have to be provided the opportunity to purchase stock in the company?
The actual cash accounts are held by a brokerage firm such as Fidelity or TD Ameritrade. According to Dallas Kerley, the cost of having a firm like Fidelity or TD Ameritrade hold the retirement accounts is negligible or free.
Who is actually holding the retirement accounts?
79% Male Owned Businesses21% Female Owned BusinessesAverage Age: 50 Years OldAverage Amount Of Rollover: $180,000
Who is typically doing a Rollover For Business Startups?
Type Of Company: 32% New Franchise 31% New Non-Franchise Business 4% Recapitalization of an Existing Business 33% Purchase of an Existing Business/Franchise
Who is typically doing a Rollover For Business Startups?
Our Recommended Robs Provider is Guidant Financial
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Our Recommended Robs Provider is Guidant Financial
Click Here To Learn More
Our Recommended Robs Provider is Guidant Financial
Click Here To Learn More
Our Recommended Robs Provider is Guidant Financial
Click Here To Learn More