A rollover for business startups (ROBS) is a way to use funds from your personal retirement accounts without having to pay the usual taxes or early withdrawal penalties. The retirement funds are transferred to your company’s retirement plan, which must be structured as a C Corporation (C-corp). The retirement plan then purchases stock in the corporation, which then gives you the ability to use the funds for business expenses.
We recommend using a provider like Guidant Financial. It offers a high level of service to walk you through the process and provides a comprehensive level of legal support and audit protection.
What You Should Know About a ROBS
- To be eligible for a ROBS rollover, your business must be structured as a C-corp. It’s also recommended that you have at least $50,000 in retirement savings for the rollover.
- While a ROBS rollover can be beneficial, it does carry some risks—if your business fails, you could lose all of the funds from the rollover.
- If not done correctly, a ROBS can result in fines and penalties. You can work with one of the companies on our list of the best ROBS providers to navigate tax rules and regulations. Many of them also provide legal support and audit protection.
- A ROBS is not a loan, but you’ll usually pay $2,000 to $4,000 in setup fees if you work with a ROBS provider.
Frequently Asked Questions (FAQs)
A rollover for business startups is a complex transaction with many rules and regulations. To save you time and give you a brief overview of what a ROBS consists of, here are some common questions regarding the ROBS program.
Setting up a ROBS rollover is a complex process but can be summarized in three major steps. First, you’ll need to have a retirement plan set up under your C-corp. You can then roll over your personal retirement funds to that of the C-corp. Those funds are then used to buy stock in the company, at which point you’ll have the funds available for use.
Funds obtained through a ROBS program must be used for business purposes. Examples include purchasing business equipment, covering operational expenses, and funding payroll needs. Funds can be used for an existing business, acquiring a new business, or investing in a franchise.
To do a ROBS rollover, most providers require that you have a balance of $50,000 in an eligible retirement account. Your business must also be structured as a C-corp. Unlike loans, a ROBS has no requirements for credit score, time in business, or revenue.
You can be assessed fees and penalties if you complete a ROBS rollover but do not use it for qualified business expenses. If you’re thinking about starting a business or purchasing another company, this is a risk that should be taken into consideration if you’re unsure if you’ll see it through to completion.
If your business fails, you could lose all the personal retirement funds that were used in the ROBS rollover. Businesses that fail must also file additional paperwork to terminate and unwind the ROBS program properly.
Yes, you can unwind a ROBS if you want to close your business as a result of a business failure or sale of the company. However, you’ll need to remember to file the appropriate paperwork to avoid fees or other penalties.
Pros & Cons of a ROBS Rollover
| PROS | CONS |
|---|---|
| Provides tax- and penalty-free access to retirement funds | Must be a C-corp to qualify |
| No requirements for credit score, time in business, or revenue | Risk of losing retirement funds if business fails |
| No interest charges or loan payments required | Completing a ROBS can take several weeks |
| Funds can be used for a variety of business-related expenses | Must adhere to ongoing compliance requirements to avoid penalties |
| Does not require any collateral | Many ROBS providers charge one-time and recurring maintenance fees |
Who a ROBS Is Right For
If you fall into any of the following categories, it could mean that a ROBS might be a good fit. If you’re still unsure, many ROBS providers will allow you to schedule a free consultation to discuss it in greater detail with you:
- You want to avoid debt payments: A ROBS is not a loan, so there is no debt for you to repay. Without the burden of needing to make debt payments, this can allow you to manage your business with higher levels of monthly cash flow.
- You are unable to qualify for a business loan: A ROBS rollover has fewer qualification requirements compared to a traditional loan. The two most difficult requirements to meet include having a balance of around $50,000 in retirement funds, and a business structured as a C-corp. Typical loan requirements such as credit score, time in business, and revenue are not applicable for a ROBS.
- You don’t want to hurt your credit: Getting a ROBS will not impact your credit. Most loans, on the other hand, can temporarily lower your credit score in the short term. This is because applying for credit can result in a hard credit inquiry which typically lowers your credit score by several points. Having a new loan can also negatively impact your credit score as it lowers your average age of credit accounts.
Prohibited Uses of ROBS Funds
ROBS funds must be used for a business purpose. Within the scope of business expenses, however, there are several uses of funds that are not allowed:
- Paying yourself an unreasonable salary: To avoid penalties or fees, the salary you pay yourself must be considered reasonable, and you’ll need to be able to support this if audited by the United States Department of Labor (DOL) or IRS. You can consider average salaries for individuals performing your job functions, as well as the salary you’re earning in relation to the revenue generated by your business.
- Funding a business that is not an active operating company: An active operating company is one that is actively engaged in selling a product or service. You also need to play an active role in your company’s day-to-day tasks. Some examples can include managing payroll, assigning employee shifts, and maintaining the cleanliness of the business premises.
- Funding a business engaged in activities that are not legal federally: If your business deals with products or services that are not legal at the federal level, you cannot do a ROBS rollover. Cannabis, while it may be legal in certain states, is not allowed at the federal level and would be one example of an industry that would not be eligible for a ROBS.
- Paying certain third-party professional fees: ROBS business funding cannot be used for certain third-party services, such as setting up and maintaining the ROBS program. Rather, these services must be paid for using a separate source of funds.
- Using business property for personal use: Using ROBS funds for anything other than business purposes is prohibited by the IRS. Doing so can result in fines and penalties.
Risks Associated With a ROBS
Since you’re using your personal retirement accounts to fund business expenses, a business failure could result in the loss of your retirement balance. To illustrate the likelihood of something like this happening, the IRS conducted a ROBS compliance project study of this in 2009.
It found that most businesses that used a ROBS for funding eventually failed or were on the brink of bankruptcy. Other findings showed that it was not uncommon for businesses to overlook ongoing compliance requirements, something that can lead to fines and penalties.
Due to the potential downsides involved with a ROBS, you should consider whether the risk is worth it for you. If you do decide to pursue a ROBS, we recommend using a company from our list of the best ROBS providers to walk you through the process and avoid the most common mistakes.
ROBS Costs
- One-time fees: These can range from $1,000 to $5,000. This will depend on the ROBS provider you choose. In many cases, you get what you pay for. ROBS providers that charge higher upfront fees tend to offer additional legal support, audit protection, and other services. Those items can save you time and money if audited by either the DOL or IRS.
- Recurring fees: Monthly recurring fees typically run from $100 to $200. These typically cover the cost of maintaining your C-corp’s retirement plan. It also covers services provided to you for things like ongoing administrative and guidance for paperwork filing requirements.
ROBS Requirements
Getting a ROBS can be easier than qualifying for a loan. This is because a ROBS has far fewer upfront requirements. However, it does have ongoing compliance requirements which must be satisfied to avoid being assessed penalties by the IRS. Below are some of the upfront and ongoing requirements to be aware of.
Although most personal retirement accounts are eligible, there are some that cannot be used on a ROBS program. Below is a list of eligible retirement accounts:
- 401(k)
- 403(b)
- Thrift savings plan (TSP)
- Traditional IRA
- Keogh
- Simplified employer pension (SEP)
To do a ROBS rollover, you’ll typically need a minimum balance of $50,000 in an eligible personal retirement account. This figure can vary depending on the ROBS provider you choose. As a general rule of thumb, if a provider’s fees are excessive in relation to the amount you are looking to roll over, you may not be able to do a ROBS.
If you do have a sufficient amount in your retirement accounts, make sure you roll over enough to satisfy your business funding needs. Although additional rollovers can be done, it often comes with additional fees.
To do a ROBS, your business must be structured as a C-corp. No other business structures are eligible.
One requirement of the ROBS program is that you must draw a reasonable salary and is something that may be reviewed if audited by the DOL or IRS. A reasonable salary may be determined by factors, such as the wages paid in relation to your company’s income, the average salary in your industry for someone performing your job duties, and the level of your knowledge and experience.
To meet the definition of an active employee, you must be engaged actively in your business. Some examples can include processing payroll, assigning employee shifts, and acting as a floor manager.
To remain compliant with IRS regulations, you must allow employees to contribute to your company’s retirement plan. Some flexibility can be granted, such as requiring new employees to reach a minimum number of days of employment before being eligible to participate.
How To Get a ROBS
Getting a ROBS involves several steps. If you decide to work with a ROBS provider, it will guide you through each stage of the process to ensure compliance with tax rules and regulations.
To be eligible to do a ROBS, your business must be structured as a C-corp. This is largely because this business structure is the only one that can issue the type of stock that will allow you to get access to your personal retirement funds. S-corporations, partnerships, and sole proprietorships could not pursue a ROBS for business funding.
If you are already structured as a C-corp or have created a new C-corp, the next step will be to create a retirement plan under this business structure. Some retirement plan options include a 401(k), a defined benefit plan, and a defined contribution plan.
To oversee and manage the retirement plan, you’ll need to choose a custodian. The custodian can provide a platform for plan participants to manage their accounts and is responsible for the administration and management of paperwork and logistics for all plan participants, such as issuing year-end tax forms, monthly statements, trading, and more.
If you have a 401(k), you can choose a custodian from our list of the best 401(k) companies.
Once the C-corp retirement plan is set up, you can now transfer funds to it from your personal retirement accounts. Most ROBS providers require a minimum of $50,000 in funds to be transferred during this step.
Once your C-corp’s retirement plan is funded, it will purchase shares of stock in the company. In other words, the retirement plan gives funds to the corporation in exchange for shares of stock. This makes funding available to the corporation which can then be used for business-related expenses.
As long as you use ROBS funds for a business-related purpose, you should not run into any issues if audited by the IRS or Department of Labor (DOL). Business uses can include things like payroll, equipment, machinery, vehicles, furniture, operational expenses, and more.
Additional ROBS Rollovers
There’s no limit to how many ROBS transactions you can do. If you decide that you need more business funding, you can do additional ROBS rollovers. However, depending on your ROBS provider, you could be charged additional fees for each individual transaction.
Additional ROBS rollovers may also carry additional requirements. For example, it is common to have to show a positive business valuation, something that can be done by having a business appraisal completed.
Unwinding a ROBS
Unwinding a ROBS requires certain steps to be taken to avoid fees and penalties. Unwinding, or terminating a ROBS, can occur if the business fails, you want to sell or close the business, or otherwise want to discontinue the C-corp.
Determining what your company is worth can be accomplished by performing an appraisal of the business assets and current stock price. Businesses that are insolvent must be able to provide financial documents that support a stock valuation of $0.
This step must be done to liquidate company assets. This can include physical assets as well as company stock. Funds received from this step are then distributed to shareholders based on the percentage of ownership each individual holds.
Part of terminating the retirement plan requires proper notice to be given to all plan participants. Additional paperwork may also need to be filed depending on where you are located and the specific details of your business. You can learn more in our guide on how to terminate a ROBS 401(k) plan.
IRS form 5500 must be filed as it formally notifies the IRS that your corporation’s retirement plan has been terminated. Skipping this step can result in the IRS assessing fines and penalties.
ROBS Rollover Compliance Requirements
An important aspect of getting a ROBS involves conducting annual reviews to meet ongoing compliance requirements. In other words, a ROBS is not something that you can set up and forget about.
The list of items that must be reviewed can be lengthy. We recommend working with your accountant and a ROBS provider to keep track of these requirements:
- File business tax returns: You must file your C-corp’s tax returns in a timely manner each year to remain compliant. Tax return extensions are also permissible as long as they are filed on time. ROBS providers will not be able to handle this step for you, but they can keep you informed of the filing deadline.
- File Form 5500 for your retirement plan: Form 5500 must be filed with the IRS each year, which states the value of your corporation’s retirement plan. Learn more about what this is and how to fill out the form in our guide on IRS Form 5500.
- Maintain an ERISA fidelity bond: This offers protection to plan participants against loss or theft of funds as the result of illegal activity. You must maintain adequate coverage, which is currently the lesser of $500,000 or 10% of the plan’s value.
- Review state-specific requirements: Additional filing requirements may apply depending on the state you are located in. Your ROBS provider may be able to provide guidance for this step.
- Keep your C-corp in good standing: C-corps have ongoing requirements that must be met if you want the business to stay in good standing with the IRS, the secretary of state, and other state and federal regulations. Some of these requirements can include properly recording meeting minutes, holding a sufficient number of shareholder meetings, filing annual reports, and maintaining accurate financial records.
- Maintain status as an active operating company: To be considered an active operating company, you must be primarily engaged in the business of selling a product or service.
Alternatives to a ROBS
Using a ROBS can be a great way to fund your business without taking on debt. However, it’s not the only option you have. If you have a 401(k) for instance, you can also cash it out or get a loan, something we talk about in greater detail in our guide on how to use a 401(k) to fund a business.
If you’re looking for a simpler source of funding or do not want to risk losing your retirement funds, here are some more alternatives you can consider:
- Small Business Administration (SBA) loans: SBA loans can offer low rates for businesses that have strong credit and finances. View our recommendations for the best SBA lenders.
- Startup business loans: Some lenders specialize in lending to startup companies. Funding options can include different types of loans, such as microloans, equipment financing, personal loans, and more. Head over to our guide on startup business loans to learn more about each option.
- Loans from friends and family: Borrowing money from friends and family can have lower rates than what you might otherwise get from a lender. Repayment terms can also be more flexible. To see if this might be right for you, you can check out our article on how to ask friends and family to fund your business.
- Venture capital: By giving up some equity in your company, a venture capital firm will provide funding for your business. This is not debt so there are no monthly payments required. Learn more about whether this might be right for you in our article on what venture capital is.
- Angel investors: Angel investors can give you funding in exchange for equity, or part-ownership, in your company. This is similar to venture capital but is a less formal process. To learn more about what it is and how to get it, you can read our guide on angel funding.
If you decide to pursue a business loan, we recommend heading over to our guide on how to get a small business loan. It contains information on how to choose a lender, what the loan process entails, and how you can improve your chances of getting approved.
Bottom Line
If you’re looking to fund your business without taking on debt, a ROBS can be a good option. However, it’s important to understand the risks associated with doing so. A business failure, for instance, could result in the loss of the entirety of your retirement funds. Additionally, maintaining a ROBS requires various paperwork and filing requirements to remain compliant. Before selecting a ROBS rollover as a funding source, you should consider alternative sources of funding to determine which is best for you.
