Starting or Acquiring a Business

While you may use the combination of an IRA and LLC to start, invest in, or acquire a business, if you (or another person considered a disqualified person) will be actively involved in the business, there is only one legal way to do it and that is through a structure commonly known as ROBS ( Rollover Business Start-Up solution) (ROBS). This structure offers significant advantages to an active business owner including the ability to receive a salary and other compensation for your services.

The ROBS structure typically involves the following sequential steps:

  1. An entrepreneur or existing business owner establishes a new C Corporation;
  2. The C Corporation adopts a prototype 401(k) plan that specifically permits plan participants to direct the investment of their plan accounts into a selection of investment options, including the stock of the C Corporation.
  3. The entrepreneur elects to participate in the new 401(k) plan and, as permitted by the plan, directs a rollover or trustee-to-trustee transfer of retirement funds from another qualified retirement plan into the newly adopted 401(k) plan. The transfer of funds to the 401(k) is done “tax free.”
  4. The entrepreneur then directs the investment of his or her 401(k) plan account to purchase the C Corporation’s newly issued stock at fair market value ( i.e., the amount that the entrepreneur wishes to invest in the new business); and finally
  5. The C Corporation utilizes the proceeds from the sale of stock to purchase an existing business or to begin a new venture.

Bottom Line; You get to use your current retirement plan funds without taxation to invest in a new or existing business (if you withdrew the funds without rolling over the funds into the 401(k), the withdrawal would be taxable). While the profits from the business are taxable at the corporate level, distributions to the participants in the 401(k) plan (you and any other participant) are tax deferred and are not taxable until withdrawn from the plan.

Our tax attorneys will take the lead in every step in the process and will work with you to ensure ongoing compliance.