Utilizing a Rollovers as Business Start-Ups (ROBS) plan can offer a way to fund your business using retirement savings, but it comes with notable disadvantages, primarily centered around risk, structural requirements, and cost.
A primary risk associated with a ROBS plan is the potential loss of your retirement savings if the business ultimately fails. This type of funding also requires your business to be established specifically as a C Corporation, as no other business structures qualify. Furthermore, because the rules surrounding a ROBS plan are significantly complex, there are substantial setup and ongoing maintenance costs involved.
Understanding the Disadvantages of Using a ROBS Plan
While a ROBS plan can unlock capital for your new venture, it's crucial to weigh the potential drawbacks carefully. These disadvantages can impact your personal financial security, your business's legal structure, and your operational budget.
1. Risk to Retirement Savings
One of the most significant risks is directly tied to the success or failure of your business. As highlighted in the provided reference:
- If the business ultimately fails, you and other investors risk losing your retirement savings.
This means the funds you have diligently saved over years for retirement are directly exposed to the inherent uncertainties of starting and running a business. Unlike traditional business loans, which you might repay from non-retirement assets, a failed ROBS-funded business can deplete your retirement nest egg entirely.
2. Strict Business Structure Requirement
The legal structure of your business is non-negotiable when using a ROBS plan.
- Your business must be established as a C Corporation. No other business structures qualify.
This requirement can be a disadvantage depending on your business goals and tax strategy. While C Corporations offer certain benefits, they also come with potential complexities like double taxation (tax on corporate profits and again on dividends paid to shareholders) that other structures like LLCs or S Corporations might avoid. Choosing a C Corporation structure solely for ROBS funding might not be the optimal choice for your business in the long run.
3. High Setup and Maintenance Costs
Setting up and maintaining a ROBS plan is not simple or inexpensive.
- Because rules surrounding a ROBS plan are so complex, there are significant setup and ongoing maintenance costs.
These costs arise from the need for expert legal and administrative support to ensure compliance with stringent IRS and Department of Labor regulations. Errors in setting up or managing a ROBS plan can lead to severe penalties, including prohibited transaction taxes and disqualification of the retirement plan, making ongoing professional assistance a necessity, not a luxury.
Summary of Disadvantages
Here’s a quick overview of the key disadvantages:
| Disadvantage | Description | Implication |
|---|---|---|
| Risk to Retirement Savings | Retirement funds are used directly for business funding. | Potential loss of entire retirement savings upon failure. |
| C Corporation Requirement | Business must be a C Corporation. | Limits choice of business structure, potential tax issues. |
| High Costs | Complex rules lead to significant setup and ongoing maintenance expenses. | Reduces available capital, ongoing operational cost. |
Considering a ROBS plan requires careful evaluation of these potential downsides against the benefits of using retirement funds. Consulting with financial and legal professionals experienced in ROBS plans is essential to understand the risks and compliance requirements fully.
