In this article we continue with some of the most advantageous reasons why a Roll Over as Business Startup (ROBS) works for some entrepreneurs, and discuss further insights as to why we want to leverage these concepts to the entrepreneurs’ advantage.
Attract & Retain Better Employees
When using a ROBS arrangement, the shareholder is required to provide the ROBS 401(k) plan to all employees. When running a small business, very few employers can boast about offering a retirement plan to their team members. Being able to post job positions that typically pay minimum wage, but also offer retirement accounts, can make the difference between those workers coming to work for your business versus going somewhere else.
Facing the pandemic in 2020, dozens of millions of U.S. employees were suddenly granted opportunities to work from home, and many of these workers subsequently declined to return to their former jobs under former terms. Dozens of millions of workers gained leverage to be more selective, and in a word, more demanding — when it comes to what they expect from an employer — and what they will accept in terms of an employment agreement.
A body of employment retention research* suggests that compensation is a highly motivating factor toward attracting and retaining workforce talent. This is not a startling finding: “Money talks, and baloney walks.” But up-to-date indicators substantiate the hiring advantage employers can leverage by offering holistic compensation — that is, a fair and competitive wage, combined with deferred benefits and perks — such as a 401(k) retirement plan with some manner of matching deposits.
* Examples of employment retention research can be found in both academic scientific literature, such as this from the International Journal of Applied Management Sciences and Engineering: https://www.igi-global.com/article/the-high-road-approach-to-compensation-and-benefits-practices/286179 , and in more down-to-earth anecdotal advisory reports, such as Small Business chron.com: https://smallbusiness.chron.com/importance-compensation-workplace-38470.html
Easier to Leverage Additional Capital
Securing financing is always a significant challenge — but a ROBS C-Corporation is better positioned to attract more capital when compared to wholly owned limited companies.
Since ROBS Corporations are not burdened with debt, they have more cashflow available to grow the business. This allows these companies to grow at a higher multiple rather than if they were burdened with small business loans. The result is a faster growing company with little to no debt. This makes the company generally more attractive to investors and creditors, making it easier to secure additional capital.
In addition, the entrepreneur who uses a ROBS can also announce additional stock issuances in future years — which can be used to levy additional funds from their retirement account or attract outside shareholders.
If you are a ROBS entrepreneur, and would like to talk about accounting wisdom for attracting additional capital or planning additional future stock issuance, Baum CPA is ready to help. Schedule a consultation with us by clicking here.
Supercharge Your Retirement Accounts
A profitable and successful business that utilizes a ROBS arrangement is positioned to return profits back to the shareholders’ retirement account. This happens in four big ways:
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Employee deferrals of wages to the company retirement plan
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Employer matches to the company retirement plan
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Declaration and payment of Dividends paid to the shareholders (and the biggest shareholder is your retirement plan!)
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Any capital gains on the sale of the business are paid out to the shareholders (can you guess who that is? The retirement plan!)
Can you think of any other business structure that offers its owners so many ways to put money aside for retirement?
As a shareholder-employee of the company, the owners are entitled to a reasonable wage as well as the ability to participate in the retirement plan. They may defer from their salary up to $20,500 per year from their employee compensation. Plus, the corporation can also match up to 25% of the officers’ salary as a company match (after considering the matching requirements for their employees).
Beyond this, the corporation can also declare a dividend of its after-tax profits to the shareholders. When a business has matured and creates consistent profits, dividend payments become a very powerful means of returning wealth into retirement accounts.
Lastly, when it’s time to kick back and relax on a sandy beach — and sell your company — the profits from the sale return to the shareholders. If your retirement account owns the majority of the company — that account will see the majority of the proceeds, which are tax-deferred until you draw from your retirement account.
If you’re considering using a ROBS arrangement, we welcome you to give Baum CPA a call and discuss planning for your ROBS accounting needs. You can schedule an initial consultation with us by clicking here.
Continue reading about this topic at The Advantages of ROBS [Part 1].
This blog and its authors provide this content strictly for informational purposes. No content herein should be misconstrued as financial advice. Everyone’s specific circumstances vary — Always consult with a qualified, licensed financial advisor, legal counsel, and tax professional before venturing into any investment or business activities.