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There are a lot of details that go into setting up your small business with funding from a Rollover as Business Startup (ROBS). One of these is establishing a C-corporation.

Many entrepreneurs question this change: Why does it have to be a C-corp? What benefits and restrictions come with C-corps?

What is a C-corp?

C-corps are the most common type of corporation in the U.S. Establishing your startup as a C-corp means that your business is its own legal entity, separate from you as the owner. The C-corp would still exist, even if you left the company.

The key differentiator about C-corps is they allow owners to sell unlimited stock in their companies. There is no cap to the number of shareholders you can have in a company, so theoretically, C-corps offer unlimited growth potential.

C-corps are given freedom to report capital and operating losses on future years, which is often a benefit for new small businesses. They also offer a number of tax advantages, with a range of tax-deductible business expenses that help lower your business’ tax liability.

C-corps are often compared to S-corporations, which operate somewhat similarly. However, S-corps are restricted to 100 shareholders maximum, while C-corps have no limit. The tax structure of these two corporations also differ.

To establish a C-corp, Articles of Incorporation must be filed with your state. Over time, you’ll likely be required to file annual reports to the state to maintain your incorporation standing.

Why are C-corps essential to ROBS?

Two of the biggest mistakes made when setting up ROBS is not incorporating as a C-corp or changing their incorporation status to another corporation type later on.

If you’re using ROBS to capitalize your small business, you’ll need to establish your business as a C-corp and keep it that way. After you roll your existing retirement plan into a self-directed 401(k) under your new business, you’ll need to purchase stock in your company using your retirement funds.

The only way it’s legal to purchase stock of a retirement plan sponsor is if the plan sponsor is a “separate tax-paying entity.” A C-corp is the only corporation type that qualifies under this requirement. Once your business is a C-corp, you can purchase as much stock as necessary, giving your business working capital to use on all kinds of business expenses.

Once your 401(k) and C-corp have been established, you’ll also need to give all employees (age 21 years and older and have been with the company with one year) an opportunity to participate in the employer-sponsored 401(k) and purchase stock in your small business. If you don’t do this, you’ll violate the regulations surrounding ROBS legality and may be subject to fines and fees.

Clear up C-corp confusion with your plan administrator

If you’re using ROBS to finance your business, work with a reliable third-party administrator like Tenet Financial Group. Our team will help answer your questions regarding C-corps, ROBS regulations and much more, so your business stays in compliance. Tenet Financial Group has never had a ROBS plan flagged for non-compliance and zero of our clients have ever been audited by the IRS. Our clients take great comfort in knowing when they work with Tenet Financial Group, they have our combined century of experience working for them! Contact us today to learn more!