Mistake 1: Not Paying the Owner a Salary. One of the IRS’s primary concerns with ROBS is that business owners might use it as a tax shelter rather than a genuine business investment. Owners who work in the business are required to receive a reasonable salary — at least comparable to what the role would pay in the open market. Paying yourself nothing or a token amount can lead to a compliance issue.
What You Need to Know
Mistake 2: Failing to File the Annual Form 5500. All qualified retirement plans must file Form 5500 each year. Missing this filing — or filing it late — is a compliance failure that can draw penalties.
Mistake 3: Not Offering the Plan to Eligible Employees. The 401(k)-plan established through ROBS must be a genuine plan offered to all eligible employees of the corporation, not just the owner. Restricting plan participation to the owner while excluding qualifying employees violates plan rules and can lead to disqualification.
Mistake 4: Failing to Maintain Proper Corporate Formalities. The C corporation must operate as a real business: holding board meetings, keeping minutes, maintaining separate finances, and filing corporate tax returns. Failing to observe these formalities can undermine the legal standing of the entity. The documents to keep on file are very simple and readily available on line. Any CPA can file your C Corporation tax return. It is a standard return.
Working with an experienced ROBS provider is important. They are able to guide and help you along the way. It does not need to be complicated or difficult as some make you believe.
Ready to Take the Next Step?
Ready to explore whether your 401(k) can fund your entrepreneurial dream? Contact Business Funding Trust today for a free consultation. Our specialists can walk you through your options, help you understand the process, and lead you to a successfully funded business.
