What’s a ROBS Reversal? | By: John Mollica, CPA, CISA
What’s a ROBS Reversal?
And while we’re at it, what is a ROBS & how does a ROBS work?
Before I jump into what a ROBS Reversal is, let me first tell you what a ROBS is.
A ROBS, or Rollover for Business Startups, is a method of obtaining business funding. You obtain funding by moving money out of your retirement fund and into your business. New franchisees will often use ROBS funding to cover the franchise fee and other initial expenses involved in opening a franchise.
What are the advantages and disadvantages to using a ROBS?
Advantages of a ROBS Reversal & ROBS Funding:
- Debt-free funding for your business
- Pull 401k funds out tax-free
- Very fast funding
Disadvantages of a ROBS Reversal:
- Retirement funds at risk (if business fails, your retirement funds are gone)
- High annual fees (typically $1,500)
- You HAVE to form a C-Corp, which is disadvantageous for most small businesses from a tax perspective
- Incredibly difficult to reverse
So as you can see, there are reasons you may or may not want to use this method for funding your
Let’s say you enter into a ROBS and then decide you want to leave it.
Well how does that work? This is called a ROBS Reversal.
The process to reverse ROBS funding is very complicated and should not be attempted without
- Estimating the price of your business
- Communicating, in written form, your request to leave the ROBS to all requisite parties
- Obtaining funding to cover your price estimate
- Re-purchasing your business shares
- Dissolving/converting the C-Corp
- Forming a new entity
As you can see, the process is very complicated.
Incorrectly estimating your business’s price or excluding certain required parties from your written communications could result in costly fines, penalties or negative tax effects.
Don’t worry. We’re here to help. My Franchise CPAs helps franchisees like you who need to reverse
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