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What is a Rollover for Business Startups?


Starting a business can be risky right now. Many businesses have declared bankruptcy after having to shut down for months due to the COVID-19 pandemic. In fact, many banks aren’t even lending right now due to the poor economy.

This means that if you have a good business idea but lack the money to make it happen, getting the money could be a problem. However, it’s possible to start a business without taking on any debt. However, you will need a retirement account. This option is called a rollover for business startups (ROBS).

A ROBS enables entrepreneurs to fund their business using their retirement money. While this is a complex process that requires some risk, if your business is successful, this risk could pay off. Is a ROBS right for you? Read on to learn more.

How Does a ROBS Work?

A ROBS allows you to roll over money from a 401(k) or IRA into your business without having to pay taxes or early withdrawal penalties. This works for franchises as well. Even if you are under age 59 1/2, you will not be penalized.

A ROBS is not a loan. There is no interest involved and you don’t pay it back. However, to be eligible for a ROBS, you will need to do two steps first: open a new business 401(k) and incorporate your business as a C-corp. Once you complete those two steps, you can then transfer money to your business.

ROBS Guidelines

However, that’s not all. A ROBS has strict guidelines and requirements involved. First, you must use a qualifying retirement account. These include plans such as 401(k), 403(b), IRA, Simplified IRA, Thrift Savings plan and Keogh. If you’re still working, you’ll likely need to use a retirement plan not associated with your employer.

In addition, you must have a minimum of $50,000 in the account. You must run the business full-time, so if you had plans of being a passive investor, this won’t work for you. Finally, you must pay yourself a reasonable wage. While many CEOs make tens of millions of dollars a year, that won’t be the case here. If you pay yourself a wage that is considered excessive, you could face tax consequences.

Keep in mind that you also can’t use your business property for personal use. Also, because of all the steps involved, it’s recommended that you use a lawyer. Plus, you’ll need to incorporate your business as a C-corp, which can be quite complicated. A business lawyer can help with this. 

Learn More About Business Startups

Starting your own business can be exciting, but it can also be costly. Many people don’t qualify for loans nor do they necessarily want one, so a ROBS might be a viable option.

Learn more about the ins and outs of owning your own business from Orlando business startup lawyer B.F. Godfrey from Godfrey Legal. He can answer your questions, address common concerns and help you avoid common mistakes. To schedule a consultation, call (407) 890-0023 or fill out the online form.



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