Donna Bordeaux, a CPA, explains how ROBS plans and self-directed 401(k)s let you use retirement money to buy a campground. ROBS requires setting up a C-corporation and filing Form 5500 annually, with significant setup and ongoing costs. She warns the structure creates tax, operational, and exit complications that need professional guidance.
Questions this video answers
Rollover for Business Startup.
Guidant Financial.
About $5,000 to $8,000, depending on complexity.
$139 per month.
Form 5500 (filed with the Department of Labor).
Chapters
Foreign Donna Bordeaux with campgroundaccounting.com As a CPA, we run across many forms of entity structures used to purchase businesses and especially campgrounds. But one that we run into a good bit lately are the Robs plans. And Robs is short for Rollover for Business Startup. And it is a format that allows you to purchase purchase your campground and use your 401k money to buy stock in that new entity in your investment in the campground. Now, this is not a do it yourselfer kind of a thing. You're going to have to have an administrator help you do all the setup work, the legwork. And there are annual filing requirements. One of the most popular companies we run into is Guidant Financial. They do a lot of these plans. Typically you're going to find startup costs in the range of about five to $8,000 is what we usually see, depending on complexity. And you'll pay $139 a month to Eternity right now to maintain and make sure that they are watching over your structure for you. Now, they're not going to do all of your accounting or anything like that for you, but they are going to file the Form 5500, which is the retirement plan document. When your 401k is rolled over into a separate little bundle that invests in the stock, that plan has to file. A Form 5500, which is an ERISA or retirement document that gets filed with the Department of Labor, doesn't have anything to do with the irs. Okay, now I want to talk to you briefly about what the functions are in the Rob and what makes it attractive to people and what are some of the complexities that come along. Now obviously financing is a tough thing in getting into a business these days. So when buying a campground, one of the logical places people look and think are friends and family and their retirement assets. Many people have retirement assets and they'd like to retire from a company where they will then be able to roll those assets over. So what they're doing is rolling those into a self directed 401k and that self direction is purchasing the stock of the campground. Now when that happens, you've got some filing requirements that you're going to have to comply with. And you've got a lot of hoops you got to jump through. This is interesting old business structure that you can kind of throw together and hope everything works. You've got to have a really solid plan here. So what this means is the new entity structure for the campground must be a C corporation. You as the owner must Take a payroll through a W2 structure. You can't just do a combination of distributions along with it. Those would be dividends and those same dividends would have to be paid in proportion to ownership, which your 401k is going to be an owner and you're going to be an owner and you may have some others as well. So a little more difficult structure to work with. Now, a couple of the downsides, you are going to end up paying more in taxes. I can tell you that the C Corp structure has a little more favorable rates now with the passage of the new law in 2018. However, a lot of the creativity kinds of pieces that I put into play with campgrounds cannot be accomplished the same way in the C Corp structure just has some more limits and boundaries that you'll have to follow through on. Secondly, you'll want to make sure that you have a plan to exit. Now, generally people are worried about getting in, buying in, and then that day somewhere where you exit is just so far down the road they don't really think about it. But exiting the market and selling your campground at some time in the future is much more difficult. In this strategy, you've got a lot more to consider in how you exit. You're not going to get the favorable capital gains treatment on the portion that goes into the 401k. Now, who's to say that law will still even be in place when you exit? I get that. But it is a lot more difficult to work around this structure. So I don't recommend that you go into this blindly. I recommend that you definitely have some software solid consultation before going into this structure. And I'd be happy to talk with you about that so that you'll be well aware of the pros and the cons. I will give you a good example of when this might not be the perfect structure for you. I had a case where somebody wanted to roll over $100,000 from their 401 in this structure and they were going to have a family loan for another $500,000. Now, because that 100,000 is such a small portion of the whole loan, it makes it a lot more difficult and you're going to have a lot higher taxes to deal with. So that's a structure where I'd say, let's see if there's any other way that we can structure this so you don't have to be tied down for the rest of your operations by using this structure. However, many people have told me, hey, this was the only way we could do it. And we're much better off doing it than not doing it. I get that. But have some good advice on the front end. So if you have this structure or you're looking to purchase a campground using this structure, let's talk. Let's make sure you have all the facts before you move forward with it or have some understanding thoroughly of what needs to be done to make sure you're operating properly. So, I'm Donna Bordeaux, CPA with Campground Accounting.
