All Forum Posts by: Deidre M Lewis

 ROBS stands for ROllover as Business Start-Up.  It is a method of starting an ACTIVE business (not traditional long or mid term rentals) wherein the funding comes from the owner's retirement account.  

The flow goes like this:

1.  A business owner rolls their retirement funds into a self directed account.

2.  A C-Corporation is created.

3. The owner directs their SD account to invest in the C-Corporation. The structure must be a C-Corporation (not a trust, LLC or S-Corporation) because this is the only structure that allows an IRA account to purchase company stock.

4.  The owner becomes an employee of the C Corporation

5.  A retirement plan is created for the employees of the corporation.

6.  The owner becomes the beneficiary of the retirement plan.

7.  The company then operates as any other C-Corporation.  If/when dividends are declared, the retirement plan, as the shareholder, receives funds back into its account.

8.  The owner - as employee - can contribute to the company 401k plan, which goes back to the fund, which can then be reinvested in the company by purchasing more shares.

There are a ton of really great benefits IF IT IS DONE RIGHT.  

However,

The risks to your retirement plan are enormous if it is done wrong.  And almost all of them are done wrong.  People who try these plans forget that this is NOT their company.  The company belongs to the retirement plan.  They are just an employee/manager.

Most people will co-mingle funds, which is a huge no-no in a C-Corporation anyways.  One that also is owned by your retirement plan makes it double wrong.

Many of the businesses fail, meaning all the retirement savings are wiped out.

Of the businesses that succeed, they forget that they should pay dividends back into their retirement plan.  Essentially they end up with a retirement account that's had no opportunity to grow because the employee keeps getting huge bonuses that wipe out all profits.

If/when the company is managed incorrectly, the IRS can invalidate the plan, thus causing the entire investment to be deemed as distributed, causing a huge tax burden to the employee/original owner of the retirement fund.

It's a great way to finance a fledgling company, but man... just once in my career, I'd like to see one that wasn't an entire cluster.