Pros and Cons of Rollover as a Business Startup
Attaining funding is one of the biggest challenges faced by entrepreneurs seeking to start their own business. Without capital, you may struggle to turn your vision of a profitable business into a reality. While there are dozens of funding options for small businesses, one of the lesser-known as rollover as a business startup (ROBS).
The Basics of Rollover as a Business Startup
ROBS is a funding option available for new and existing businesses that allows the business owner to rollover his or her retirement funds into ready-to-use capital for their business. Unlike a loan, the business owner isn’t required to pay back the funds.
Basically, a business owners acquires ROBS by forming a C corporation — and that newly created C corporation acts as a profit-sharing retirement plan. Once set up, the business owner buys shares of his or her company, which in turn contributes to the business’s finances.
Pros of ROBS
Of course, there are both pros and cons associated with ROBS. Among the biggest advantages is the simple fact that there’s no debt or interest payments. As stated above, ROBS is not a loan, so you don’t have to worry about paying it back. While traditional bank-issued small business loans carry hefty interest rates and added fees, this isn’t a problem with ROBS.
ROBS as a financing option also doesn’t carry early withdrawal penalties. Normally, you will face penalties when drawing money from your retirement funds early — usually in the 10% range. With ROBS, however, you can essentially pull and use money from your retirement without these fees.
Cons of ROBS
But there are also some disadvantages to using ROBS as a funding option, such as the potential to lose money. If your business fails, you may lose part of your retirement funds.
There’s also some believe that ROBS increases a business owner’s risk of being audited by the Internet Revenue Service (IRS). You can mitigate this risk by setting up your retirement plan correctly and complying with the IRS’ guidelines. Nonetheless, some financial experts believe ROBS is a red flag to IRS auditors.