Anyone familiar with this? I'm looking to start a business and this was pitched to me. My evaluation of this is that is is risky and comes with too many strings. Great for getting quick capital at a tax advantage, but the long term strings and risks make it a no go for me, I think.

If you are not familiar with this, I can't really describe the details, I'd recommend you Google and read up. I'm sure it all makes a lot more sense to you finance guys, which I am not. But the gist is that you create a C-Corp with a retirement plan, and then you roll your personal 401k money into the new retirement plan, and then you as the majority (and likely sole) shareholder of the new C Corp can direct the funds into your business startup. That's definitely an oversimplification but I think I hit the main points.

The obvious risk is your retirements savings if the business fails. Additional risks are that staying compliant with the IRS is tricky, and if they audit and you've stepped outside the rules, the penalties are high.

The positive is that you can set this up in a matter of a couple of weeks and have funding for a new business venture, and you can take the money from your 401K with no withdrawal penalty.

Anyone want to talk me IN to this? Or is my evaluation of this plan appropriate?

Recently looked into this. As a C-Corp, you will be paying taxes on your income, as well as on any compensation you take. My takeaway from ROBS was that the government is going to get their tax revenue one way or the other on that retirement money if you want it early -- either through the income tax + penalty on a straight withdraw or once you generate income from your business. I ultimately decided against going the ROBS route as I believe an LLC is the best structure for my venture.

I also don't like that part of the strict rules is that you can only take "reasonable compensation" for your role...meaning I'm limited on how much my family can benefit from the business I want to start. But I'm not sure exactly what would be considered reasonable.

I understand why the rule is in place, it's another reason I think its an inappropriate vehicle to fund a new business.

I have been looking into this. Couple comments on above:

- It's apparently pretty common knowledge in the franchising world, but otherwise people don't seem to know about it.

- The reasonable compensation isn't to restrict your pay, it's there to ensure you actually take pay instead of avoiding taxes through distributions.

- The C Corp can file as an S Corp and avoid the double taxation.

- There are a handful of companies that set these up and administer them (yearly fee). Guidant Financial is one example.

I am still investigating and will be talking to lawyers and accountants.

HowdyTexasAggies said:

---

- The C Corp can file as an S Corp and avoid the double taxation.

---

Are you sure about that part? I don't fully understand the tax implication of S vs C corp, but I did inquire about whether or you you could set up in this plan and later transition, and was told that there were strict rules that you set up a C corp and had to stay.

I have pretty much ruled out this option at this point for many reasons, but I'm still learning.

Bluecat_Aggie94 said:

---

HowdyTexasAggies said:

---

- The C Corp can file as an S Corp and avoid the double taxation.

---

Are you sure about that part? I don't fully understand the tax implication of S vs C corp, but I did inquire about whether or you you could set up in this plan and later transition, and was told that there were strict rules that you set up a C corp and had to stay.

I have pretty much ruled out this option at this point for many reasons, but I'm still learning.

---

I am not 100% sure about anything right now The C Corp stays, but you elect to file as a S Corp. I will be talking to Guidant today asking a lot of question, and then local legal etc.

I am using ChatGPT to educate myself on many things, including this, obviously validating with a CPA and / or lawyers, but it sure has helped my learning and helps me ask better questions.

Glad you find it interesting.

My radar went up when it was pitched. This is not my world, not finance, not business...I've been employed my entire career and am looking to make a mid/late career change and become a business owner, and I'm learning a ton. I'm looking at a franchise and the consultant I worked with referred me to a company called FranFund who sets this up and also provides the ongoing TPA service for a modest fee.

The lady I worked with went through this very complicated plan really quickly, and it was way over my head at first. I think what put me off about it was that it just seemed too good to be true. I then took it to local people I trust and most people had never heard of it, and when I finally found one who had, he forwarded me an article from the IRS that basically said these can be legal but the path to stay so is pretty narrow. It's also a definite audit flag.

As we continued to figure out financing for the business we want to get into, we hit a couple of snags early so I circled back to this, but my second look has only reinforced my first impression, and we have since find another way to get done what we need to get done. So at this point, I'm not considering this anymore, but I still find it interesting. If you are interested to learn for your own sake feel free to keep investigating but for me, I've moved on. Appreciate your input.

I have read the IRS article referenced; it was issued in 2008 and the project in 2009. Per my Financial Adviser, its scrutinized because people were using it to buy cars etc. not running a legitimate business.

My current thought is that, if you are running a legitimate business, then you likely don't have much to worry about so long as you contract with someone to keep you in compliance.

I am curious on the alternative methods you chose, assuming that's not too personal (no worries if too personal)

My bigger concern is the failure rate of small business and franchises.