ROBS: Some Hidden Pitfalls

ROBS: Some Hidden Pitfalls

As discussed in a previous article, ROBS is a unique way for individuals to fund their new business dreams. Similar to a self directed IRA investment in stock, there are several rules and regulations the IRS requires to be followed. With a ROBS, individuals can use their retirement funds to either purchase a business debt-free or fund the start up costs of a new venture, here are some of the important rules to comply with:

  • The newly established eligible retirement or 401(k) account must permit the trustee to hold employer stock in a company.
  • The newly established eligible retirement or 401(k) plan must comply with the Employee Income Retirement Security Act (ERISA). Thus, all eligible employees of the new business must be able (though not obligated) to participate in the eligible retirement or 401(k) plan, and owner-employers must make contributions as soon as he or she is able.
  • The business entity must be a C corporation. LLPs, LLCs and S corps are not allowed.
  • Founders should wait to pay themselves a salary until the venture is profitable. The ERISA rules impose a fiduciary responsibility which may be violated should an unprofitable C corporation pay the founder compensation.
  • Founders of the new venture should pay any agent or promoter costs personally, and not using 401(k) or eligible retirement plan assets, to remain in compliance with ROBS rules.

Breaching any of these rules may terminate a 401(k) or eligible retirement plan. This would be an utter disaster for the business and founder alike. We urge anyone considering a ROBS to consult with competent legal, tax and adminstrators alike.

Good luck!


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