Starting up a new business requires a mixture of capital and courage, and it’s important for entrepreneurs to understand the right balance to make it work.
One tactic that some start-ups take advantage of is Rollovers as Business Start-Ups (ROBS), which allows prospective owners to use their retirement funds to pay for any new business costs. While this can provide easy access to needed capital, it’s also fraught with perils and possible downfalls.
The Rollovers As Business Start-Ups Compliance Project conducted by the IRS showed that there were few success stories, noting that “most ROBS businesses either failed or were on the road to failure with high rates of bankruptcy (business and personal), liens (business and personal), and corporate dissolutions by individual Secretaries of State.”
There’s risk associated with starting up any business, but that risk is magnified when it comes at the expense of one’s hard-earned retirement savings. Should the business fail, not only will the individual have to deal with those ramifications, but it’s also highly likely they have lost their retirement savings.
Even those that are able to get the business off the ground often find their assets are drained even before they open the doors to the public.
Compounding this obvious risk is the fact that the study determined that many ROBS promoters are providing misleading and inaccurate counsel. For instance, many who relied on ROBS were told they would not have an annual filing requirement, setting them up for a host of inadvertent penalties.
Additionally, operating a business started by ROBS doesn’t mean you own it. In fact, you are merely a manager of the business which is owned by a third party — the retirement account — and that can expose you to a variety of unpleasant situations which can trigger non-compliance of the rules for retirement accounts.
And these are just a few of the concerns associated with relying on ROBS as a means to access funding for a new business, meaning it may not be the right fit for you.
At Padgett, our network of offices has ample experience in advising, serving and supporting small businesses at various stages of their journey, from budding entrepreneur to established owner. Before you make a plan to launch your business, reach out to one of our trusted small business advisors to make a game plan and help get your dream off the ground.