Rollover for Business Startups (ROBS): The Ultimate Guide

A rollover for business startups (ROBS) is a way to invest funds from your retirement account — like a 401(k) or individual retirement account (IRA) — into your business without paying early withdrawal penalties or taxes. A ROBS isn’t a business loan or a 401(k) loan, so there’s no debt to repay or interest payments to make.

Studies have shown that business owners who use a ROBS often see higher success rates than those who rely on traditional business financing. However, getting a ROBS is unique to your situation. That’s why it’s important to consult with an expert to see if a ROBS would work for your business. If you have $50,000 or more in a 401(k) or IRA and want a free, no-obligation consultation from one of the top ROBS providers in the industry, click below.

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How a ROBS Works

A ROBS gives you access to your retirement funds to use in your business without having to borrow or cash it out. It can be used to fund a new business (or franchise), buy an existing business or recapitalize your business. When you use a ROBS, your business retirement account owns shares of your new business.

A ROBS 401(k) involves incorporating a new business and opening a new 401(k) under it. After setup is complete, you can transfer assets in from other retirement accounts and invest those funds directly in your new business. However, using a ROBS requires you to follow a set process of certain rules.

A ROBS isn’t a withdrawal from your retirement account or a loan against it. Instead, it’s a rollover that invests directly in your business. Normally, if you take money out of a retirement account before age 59 1/2, you have to pay income tax plus a 10 percent penalty for the money you withdraw. Borrowing against a 401(k) is also limited, requires repayment with interest and may require employer approval.

A ROBS is a popular way to start or buy a franchise. In fact, more than 60 percent of all new ROBS clients helped by the best ROBS providers we reviewed were franchisees. Just like any other type of startup financing, a ROBS has pros and cons that should be carefully weighed before deciding if it’s right for you.

A ROBS is a very specialized financing tool that is dependent on your personal circumstances. Depending on your business, your retirement accounts and what your goals are, the answers to your ROBS questions might be different. This is why we recommend getting a one-on-one consultation with an experienced ROBS provider who can answer all of your questions related to your personal ROBS opportunities for free.

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How to Set Up a ROBS in 5 Steps

Setting up a ROBS requires you to create a C corporation (C-corp) and then establish a retirement plan like a 401(k) for that new C-corp. Then, you roll over funds from your existing personal 401(k) or IRA into the new company’s retirement plan. Using the funds you’ve just rolled over, the new 401(k) plan purchases stock in the C-corp, at which point your startup is capitalized.

As you can see, setting up a ROBS is a complicated process that typically requires the help of certified public accountants (CPAs) and attorneys who are experienced with ROBS transactions. Many professionals may claim they can manage any legal transaction, but setting up a ROBS isn’t just about handling some paperwork. This is why most people work with a dedicated provider of ROBS.

Here are the five steps involved in setting up a ROBS correctly:

1. Form a C-corp

The first step when using a ROBS to fund your startup is creating a C-corp. Your business must be a C-corp to qualify for a ROBS because the IRS prohibits certain transactions involving qualifying employer securities that only a C-corp can pass. Meaning, a C-corp is the only business structure that can sell shares of the business to a retirement account legally. This means that a ROBS won’t work for many common legal entities like a limited liability company (LLC), sole proprietorship, limited liability partnership or S corporation (S-corp).

2. Create a Retirement Plan for Your New C-corp

The second step in setting up a ROBS is establishing a retirement plan, like a 401(k), for your new business. You have a few options when deciding on what retirement plan you want to use, and the choice typically depends on your business’s situation — how many employees you expect to qualify for the 401(k), how many highly compensated employees are expected and other factors. All of these factors would be discussed during a free consultation with a ROBS provider.

Some of the most popular retirement plans you can use with a ROBS include:

• 401(k) plan
• Profit sharing plan
• Defined benefits Plan
• Defined contribution plan
• A combination of plans, such as a 401(k) with a profit-sharing component

You’ll need to find a custodian to manage the actual investments of the retirement plan like Wells Fargo, Merrill Lynch or Schwab. Most ROBS providers don’t offer those services but will help you find a custodian to work with, and the custodian can help you identify the right retirement plan for you.

3. Transfer Funds from Your Personal Retirement Account to the New Company Retirement Plan

The third step is what makes the transaction a rollover. Once the company retirement plan is set up within your new C-corp, your existing personal retirement funds are transferred to the new retirement plan. This transfer is typically seamless, but the time it takes depends on the process of the custodian currently holding your funds.

4. Retirement Plan Purchases Stock in the Corporation

The fourth step is to use the funds in your new retirement plan to purchase stock in your new C-corp. In order to do this the business will have to issue ownership shares of the corporation.

Typically, the number of shares that are given to the retirement plan is equal to the percentage of funding the plan is providing for the business. The percentage of startup financing the retirement plan is providing won’t always be 100 percent. That’s because a ROBS can be used in conjunction with other financing like United States Small Business Administration loans, personal savings or additional partners and outside investors.

You might not want to issue 100 percent of your business’s shares during this round of funding. It may be advisable to issue only a fraction of the shares in case you want to raise money by issuing additional shares at a later date like bringing on new investors, partners and so on. This can get a little complicated, but a good ROBS provider will be able to walk you through it.

5. Funds Become Available to the Corporation

The fifth step in setting up your ROBS is fun because you can now put the proceeds from your ROBS to use. The funds are now available to start, buy or grow your business. You can use these funds for any normal business activity but not for personal expenses that you alone benefit from.

Keep in mind that there are ongoing administrative duties after your ROBS is set up. This includes a number of reporting requirements outlined by the IRS and U.S. Department of Labor, which we will discuss in more detail later in the article. A ROBS provider will handle these reporting responsibilities for you.

If the five steps involved in setting up a ROBS sound complicated, it’s because they are. That’s why so many small businesses have entrusted the ROBS process to a ROBS provider that has had lots of experience with all the ins and outs of setting up a ROBS. If you have $50,000 or more in your retirement account, click below to get a free, no-obligation ROBS consultation with one of the top ROBS providers in the industry.

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The 4 Requirements for a ROBS

A ROBS is not a loan, so you don’t have to meet traditional underwriting criteria like a credit check or cash flow analysis to qualify. This doesn’t mean that there aren’t requirements, however. To qualify you’ll need to have enough funds in your retirement account to make the transaction worth it, and you’ll need to be compliant with certain government rules.

The four requirements to be eligible for a ROBS are:

1. Currently Hold an Eligible Retirement Account

In order to use a ROBS, your funds must currently be held in a qualified (tax-deferred) retirement account. This means that, unfortunately, funds held in popular Roth accounts including Roth IRAs and Roth 401(k)s are not eligible for ROBS.

Some of the most popular tax-deferred accounts used with a ROBS include:

• 401(k)
• 403(b)
• Simplified IRA (SEP IRA)
• Thrift savings plan (TSP)
• Keogh plan
• Traditional IRA

2. Have $50,000 or More in Retirement Funds

Using retirement funds to start a business usually requires at least $50,000 to work with a ROBS provider. While not a strict rule, anything less than $50,000 usually means that the ROBS costs are likely to be cost-prohibitive. Most ROBS providers won’t be willing to work with you if you’re trying to roll over less than that.

If you don’t have $50,000 or more in retirement funds, you can still complete a ROBS transaction to fund your new business. However, you’ll likely have to do it on your own, which makes it much riskier than using an experienced provider.

3. Retirement Account Not from Current Employer

The retirement account you’re rolling funds over from can’t be administered by your current employer. Most employers will prohibit you from rolling over a retirement account while you still work for them.

You can, however, use a retirement account from a previous employer, no matter who the current custodian is. You can also use funds in a self-directed IRA, a 401(k) you’ve opened up on your own or any other eligible account you have that you opened up outside of your employers.

4. Be a Legitimate Employee of the New Business

In order to use a ROBS 401(k) you are required to be a legitimate employee of the business you’re investing in. While there is no minimum time you must work in your new business each year, 1,000 or more hours per year is usually a good rule of thumb. This means that a ROBS may not be a good option for absentee owners or for passive income businesses like real estate investing.

While you’re required to be a legitimate employee of the new business to use a ROBS 401(k), you may also be restricted in how much you can pay yourself in salary or benefits. While there are no published limits on how much you can pay yourself if you use a ROBS, taking too much money from your new business may qualify as a ROBS-prohibited transaction.

Those are the only four technical requirements, but there are other things that could impact your success with a ROBS. Typically, these things depend on what you’re using your funds for, what type of retirement account you have and what your business situation is. This is why it’s so important to have a consultation with a ROBS provider before deciding whether or not it’s the right decision for you.

One example of a situation where your ROBS may vary is if you’re using the money to recapitalize your business. If this is your situation then you should keep a few things in mind before you start the process.

“If you’re planning to use a ROBS to recapitalize an existing business, the business should be generating some revenues already. While the business doesn’t have to be profitable, there needs to be a plan for profitability once you get access to the rolled-over funds.” — Robert Newcomer-Dyer, Sales Manager, Guidant Financial

These are not requirements in the way that a loan has minimum requirements. However, a ROBS provider might not be willing to work with you if you’re trying to put a bandage on a business losing a lot of money. It’s better to invest your retirement funds into a business that can develop and grow because of your injection of capital.

ROBS Costs

A ROBS is a not a loan so you don’t have debt or interest to pay back. Instead, you’ll only be charged by the professionals you need to hire to set up and manage your ROBS. While you could do this on your own with CPAs and attorneys, an experienced ROBS provider is the recommended solution.

Guidant Financial and other ROBS providers typically charge you two fees:

1. ROBS Setup Fee

A ROBS provider charges approximately $5,000 upfront to set up your ROBS, and the fee must be paid out of your own pocket. The funds being rolled over can’t be used to pay the setup fee.

The setup fee pays for setting up your ROBS through a provider like Guidant Financial. This includes setting up the C-corp, a financial valuation of the business, the creation of the company retirement plan and filing paperwork with the IRS.

2. Ongoing Monitoring Fee

Your ROBS provider will help you administer your ROBS for a fee of $120 to $140 per month. Plus, you may be charged a per employee fee if you have more than 10 retirement plan-eligible employees. Some providers may charge you an annual fee instead of a monthly fee, but the total yearly cost is the same either way and generally, they’ll allow you to make payments on that fee on a monthly basis.

The monitoring fee typically covers providing employees notifications when they become eligible for the plan, adding and subtracting employees from the plan, annually submitting required IRS filings like the Form 5500 and keeping track of any owner’s obligations for the plan.

Because of these fees, it generally doesn’t make financial sense to do a ROBS if you’re rolling over less than $50,000. Anything below $50,000 and you’re looking at setup costs that run more than 10 percent of your funding. Considering that most startup loans have origination fees of less than 4 percent, this level of expense is generally deemed too costly.

It’s possible to avoid some of these fees if you do a ROBS on your own without the help of a ROBS provider. However, we don’t recommend this because it’s easy to run into legal troubles and tax violations when administering a ROBS unless you’re experienced.

What’s more, you would likely need to hire individual attorneys and CPAs to work on your behalf anyway. Few professionals have the experience necessary to protect you completely from the potential tax and legal liabilities a ROBS could bring if done incorrectly. It also isn’t likely to save you much money, if any at all, by using these professionals instead partnering with an experienced ROBS provider.

ROBS Prohibited Transactions

Business owners who decide to use a ROBS to start, purchase or recapitalize a business need to be especially careful to avoid ROBS prohibited transactions. Some prohibited transactions in a ROBS 401(k) include excessive ownership compensation and using business property for personal benefit. These kinds of transactions can expose you to unanticipated taxes and penalties.

Some ROBS prohibited transactions include:

Personal Use of Business Property

If you use a ROBS, you aren’t allowed to use any property of the business personally. Internal Revenue Code section 4965 places a 15 percent tax on any transactions involving the sale, lease or exchange of company property to a disqualified person including the owner, his or her spouse or immediate family.

Inappropriate Owner Compensation

If you use a ROBS for 401(k) business funding, you owe a fiduciary duty to your retirement account that owns stock in the company. This means that your compensation and benefits can’t be excessive nor can you dilute your retirement account ownership by giving yourself stock options.

When you set up a ROBS you aren’t allowed to pay yourself from retirement funds that are transferred in to fund your business. Instead, you need to pay yourself from operating revenue. If you have employees in the business that you fund with a ROBS 401(k) and you qualify as a highly compensated employee under Internal Revenue Code Section 414, you may also be in violation of 401(k) nondiscrimination testing.

Promoter Fees

When you raise money for a new company it’s not unusual to pay fees to advisors or brokers who help you raise money. However, according to Internal Revenue Code Section 4975, these promoters may qualify as fiduciaries, which would not be allowed to collect “promoter fees.”

“The IRS says that a prohibited transaction is a transaction between a plan and a disqualified person that is prohibited by law. This sounds simple, but the IRS also allows for numerous exemptions to the prohibited transactions, and this is where it becomes confusing. The purpose is to have guidelines to limit conflicts of interest between a plan and parties of interest, including plan fiduciaries. We frequently receive questions about ERISA section 406(b) that prohibits transactions that involve any type of self-dealing by the plan fiduciary. ” — Holly Bejar, Vice President Operations and Plan Administration, FranFund

Bejar went on to say that “educating the employer about the potential conflict of interest that may arise when they act as the fiduciary and as an officer of the company is a prudent way to combat a potential prohibited transaction. It is common in ROBS transactions for plan fiduciaries to also play a role in the company. We must educate our clients that when acting as a fiduciary, they are legally required to act in the best interest of the plan, regardless if that action conflicts with personal or business priorities. These types of situations are fairly infrequent, but educating the plan fiduciary is key.”

ROBS Compliance

In addition to ROBS prohibited transactions, a ROBS has additional compliance issues that business owners should be aware of. These include which employees you offer retirement plans to and what investments are offered in the plan. While it’s rare, the IRS and DOL may audit your business to ensure compliance with all ROBS 401(k) rules.

The ROBS providers we’ve reviewed report the rate of audit at less than 1 percent, and none of our recommended ROBS providers have ever had a plan disqualified during an audit. These professionals give you the support you need to prevent an audit, and to help you through one if needed.

ROBS Requirements If You Have Employees

ROBS are designed to benefit the employees of the C-corp in which the funds are invested. This means that while business owners who invest their retirement account in their new company may benefit from operations, they are required to run the company for the benefit of the retirement plan that owns the business.

If you have employees, there are two strict ROBS requirements that you must follow:

1. Eligible Employees Must Be Offered the Opportunity to Invest in the Company Retirement Plan

When using a ROBS, you’re required to educate eligible employees about your retirement plan, provide them with plan documents and make sure they have sufficient time to enroll. Employee eligibility requirements vary by state and plan design but, generally, employees must be at least 21 years old, have worked for your business for one year and have worked at least 1,000 hours during that time.

Once the employee decides to invest in the retirement plan, you must process contributions and take care of any employer tax obligations related to the plan. Keep in mind that employees can become eligible to participate in retirement plans at different times throughout the year.

Working with a ROBS provider eliminates many of these headaches because it handles most of these things for you. A ROBS provider keeps track of who is eligible and provides onboarding documents to give to employees — the only thing it won’t do is to deliver the information to your employees.

2. Employees are Entitled to Invest the Same Way You Are

All employees that are eligible for the company’s retirement plan must have the ability to invest in the same offerings as everyone else. In other words, you can’t offer some investments to owners but not to employees. If you make shares of the company part of the retirement plan offerings, then eligible employees get to buy in as well.

Keep in mind, however, that investment options within a retirement plan can change. While your plan may offer the option of investing in your new C-corp for a period of time, it may change later on. If your retirement plan changes its investment options before employees become eligible, then the newly eligible employees are not entitled to invest in past offerings. This can stop your employees from owning part of the company if you desire.

You must meet the “effective availability” requirements when educating your employees about the retirement plan. Essentially, this means you must make investment vehicles available for a significant amount of time for the employee to make an informed decision on whether to invest or not.

Abiding by the rules for eligible employees can be difficult without the right guidance. This is another reason we recommend partnering with a ROBS provider that is experienced at both setting up a ROBS and getting its clients successfully through audits. You can read our ROBS buyers guide for our top three recommended providers.

Government Audits of ROBS

ROBS are held to certain compliance standards by both the IRS and the DOL. While either of these government agencies can initiate an audit of the business to determine if the business’ retirement plan has violated any rules, the chance of an audit is extremely low. In fact, our recommended ROBS provider, Guidant Financial, reported that less than 0.35 percent of its clients were audited in 2017.

If you do face an audit, some of the things checked for compliance include:

• The retirement plan was set up correctly: The provider wants to make sure that all the requirements we discussed above have been met
• All required annual filings have been completed: The provider will double check that forms such as the annual IRS Form 5500 have been filed properly for each year the ROBS has been in place
• You meet all employee requirements: The business is required to educate employees about the plan, provide all necessary forms and take care of all employer taxes related to the retirement plan; we cover this in greater detail below.

If you use a ROBS and do encounter an audit from the IRS or DOL, your ROBS provider will help you through the audit process. This is one of the many benefits of working directly with a ROBS provider to set up your plan. Our recommended ROBS provider, Guidant Financial, has never had a plan disqualified during an audit.

Pros & Cons of a ROBS as 401(k) Business Funding

A top concern that many entrepreneurs have when using retirement funds to start a business is that if their startup isn’t successful, they could lose their investment. What many people don’t realize is that the financial risk involved with a startup and the possibility of business failure aren’t unique to a ROBS.

No matter how you fund a small business, there’s something on the line. If you go with a ROBS, there certainly is a chance that the business could fail, and you could lose your nest egg. However, if you go with another option and take out a business loan, for example, you’ll likely have to sign a personal guarantee and put up collateral. If the business fails while owing on a loan you could lose your home or other personal assets.

The risk of entrepreneurship exists no matter how you finance your business so, as with other types of business financing, we recommend balancing the pros and cons of a ROBS before deciding whether it’s the right choice for you.

Pros of a ROBS 401(k)

No Debt or Interest Payments

It can be difficult and expensive to obtain capital to start or purchase a business. Many loan providers to small businesses, particularly for startups, charge interest rates that are more than 55 percent per year. A ROBS is not a loan, so you do not incur debt and do not have to pay interest. That means the business is more cash-rich, and more gross income can be reinvested back into the business.

Better Business Success Rates

Guidant Financial commissioned a study showing that companies funded by ROBS have a much better survival rate than other startups. This is partly because they are not starving the business for funds in order to make debt payments. About 81 percent of Guidant Financial clients are still operating after four years or have successfully sold their business, whereas the standard is around 39 percent.

No Income Taxes or Early Withdrawal Penalties

If you were to simply take a withdrawal for using retirement funds to start a business, you would have to pay income taxes and, if you’re under age 59 ½, early withdrawal penalties. The penalty is typically 10 percent of the amount withdrawn. By structuring the transaction as a ROBS, you avoid these costs.

No Impact on Personal Credit or Personal Assets

When you do a ROBS, there’s no credit check and you don’t have to sign a personal guarantee. Most loans require both, which means the personal credit of the business owner can be damaged and personal assets taken if the business can’t afford to pay back the loan. In contrast, with a ROBS, the failure of the business means only that the funds you invested are lost.

Retirement Funds Can Grow in a Tax-advantaged Account

A loan is one-sided with money flowing from your business to the lender to pay back the loan. When doing a ROBS, a 401(k) plan is created for the company. You can contribute to that account as your business produces revenue and use the funds for retirement.

Cons of a ROBS 401(k)

The Possibility of Losing Retirement Money

Most new businesses fail and, if yours does, then you could lose all the money you invested. Also, consider the opportunity costs: If your retirement money was not invested in your company, it could be invested in stocks, bonds, exchange-traded funds (ETFs) or mutual funds. Assuming a reasonable rate of return, the money invested in the business could have earned much more had it been placed in more traditional investments.

You Could Be Audited

Doing a ROBS increases the likelihood that the IRS or DOL will audit your business. If they find that you violated certain rules, you may have to pay penalties and taxes. Fortunately, the increase in risk is small.

With Guidant Financial, for example, only about 0.32 percent of plans face an audit. Also, most ROBS providers will help you if you’re audited and back up their work by paying for your audit costs. Guidant even provides outside counsel to represent your best interests at no additional cost to you.

Must Administer a Retirement Plan

When you commit to a ROBS, you become the administrator of a company-provided retirement plan. Although ROBS firms provide guidance with this, you need to market the plan toward employees and help them enroll. This can take time away from your business.

Must Operate as a C-corp

It’s only possible to do a ROBS if you’re structured as a C-corporation. Many small businesses prefer the simplicity and tax advantages of an LLC or partnership instead of a corporation. You’re giving that up if you decide to do a ROBS.

Given the risks associated with a ROBS, we think it’s important to use the guidance of a professional ROBS provider. One reason we recommend Guidant Financial as the best ROBS provider for small business owners is that it gives access to independent counsel before, during and after the ROBS setup process. It also offers a free one-on-one consultation upfront to answer your questions.

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Unwinding a ROBS

Most entrepreneurs have the goal of starting a business, growing it and someday selling or exiting the business. Starting a business with a ROBS adds several steps for unwinding a ROBS in addition to the business. How you unwind your ROBS will depend on how you’re exiting your business — selling stock, selling assets or going bankrupt.

Some considerations of unwinding a ROBS include:

Business Stock Sale

If you sell the stock of your business, then unwinding a ROBS is very easy. Everyone who owns a percentage of stock in the business typically receives that portion of the sales proceeds, minus any funds required to wind down your investment or other potential business obligations. The funds given to the retirement plan for its owned stock in the business are rolled into an IRA for your benefit.

Business Asset Sale

Many businesses sell their assets instead of their stock to prevent the new owners from taking responsibility for any potential future liabilities that the current company may have. In these circumstances, unwinding a ROBS becomes more difficult.

Once the business assets are sold, the funds are used to first pay off liabilities and administrative obligations. The net proceeds remaining after those payments are then distributed to the owners of the business, including the retirement plan you own.

If Your Business Fails

If your business fails, then unwinding a ROBS still requires closing out your retirement plan. You’ll need to educate your employees on what options they have for the funds they’ve already invested in the plan. When your business fails, you do not have any obligation to pay back your original funding to anyone, but you will lose the money.

Every Scenario Requires a Form 5500

Every 401(k) plan is required to file an IRS Form 5500 annually to report plan assets, expenses, inflows and outflows. If you use a ROBS 401(k) it’s important to file Form 5500 every year that your plan is active. Even when you complete unwinding a ROBS, you need to file a final Form 5500 for the year your plan was terminated.

ROBS vs. Business Loan for Startup Funding

The most common way to fund a business is to get a business loan, which can actually strain the company’s cash flow early on for some businesses. While both ROBS and business loans each have benefits, a ROBS isn’t a loan, so you don’t have to worry about monthly payments or how you’ll pay it back.

While SBA loans for startups can be a great part of an overall financing strategy, a ROBS has different costs, levels of flexibility and accessibility for business owners when compared to a business loan. It’s important to consider these factors when deciding what works for you.

Four things to consider when deciding between a ROBS vs. a business loan include:

1. Ease of Use

Depending on the size and type of loan, a business loan can be much easier if you want to avoid the steps required to use a ROBS. Using an SBA loan instead of a ROBS, you don’t necessarily have to use a C-corp. Instead, you could use an LLC or other legal entity that may be easier. You also don’t need to set up a 401(k) plan right away if you use a business loan.

If you decide to use a ROBS, you’ll have to set up a C-corp, which can be more involved than an LLC or other entity. You’ll also need to set up a 401(k) to hold retirement assets. However, if you do use a ROBS, you won’t have to pay any of the loan rates associated with SBA or other types of business loans. However, a ROBS is a great option if you don’t want to pay interest on a business loan.

2. Cost

One of the biggest differences between a ROBS and a business loan is the costs. To use a ROBS, you’re required to pay C-corp filing fees, along with a 401(k), which has administration fees and potentially transaction fees to transfer in assets. However, a business loan usually has application fees and interest costs that make them more expensive than a ROBS.

Some ROBS vs. business loan costs include:

• ROBS C-corp filing fee ($50-$500): Setting up a ROBS requires using a C-corporation; filing fees that vary by state
• ROBS setup fee ($4,000 – $5,000): ROBS providers typically charge fees to help set up your plan
• ROBS maintenance fees ($100-$200 per month): ROBS providers charge a monthly fee to administer a plan that varies based on the number of participants
• Business loan application fee ($0-$400): Many lenders charge a small fee just to apply for a loan
• Business loan closing fee (0.1%-0.35% of loan value): If you’re approved for a loan, most lenders charge an additional fee at closing that’s based on the amount you borrow
• Business loan interest expense (5%-50%): Business loans charge an annual interest rate that varies based on the lender and type of loan

3. Flexibility

A business loan and a ROBS 401(k) both offer flexibility in different areas. While ROBS prohibited transactions restrict how and how much you can pay yourself from your business, a ROBS also gives you flexibility in when and how you use the money for the business. A business loan, on the other hand, may have a set payment schedule or limit the potential uses of your loan funds. Loans will also typically restrict how much you can pay yourself, especially a traditional bank loan.

4. Accessibility

401(k) business funding through a ROBS is typically far more accessible for small business owners. This is because anyone who has assets in a retirement account can use a ROBS while business loans are only available to those with good credit, established earnings and adequate time in business.

While there are a number of factors to consider when deciding between a ROBS and business loan, it’s also important to understand they’re often used together. ROBS are often used to supplement SBA loan funding or to meet down payment or equity injection requirements for an SBA loan. In addition to providing ROBS, many ROBS providers can help clients package SBA loan applications.

ROBS Frequently Asked Questions

We’ve put together a collection of frequently asked questions about ROBS from our readers, past ROBS users and viewers of our ROBS webinar. If we don’t answer your question in this guide or in the FAQs below, you can ask us a question in our forum or sign up to participate in our free ROBS webinar to learn more.

What Can a ROBS Be Used For?

A ROBS can be used to start a new business (or franchise), buy an existing business or recapitalize an existing business. According to Guidant Financial, here’s the approximate breakdown of how ROBS funds are used:

• Start a new business: 60%
• Buy an existing business: 20%
• Recapitalize an existing business: 20%

Does the Company Have to Be a C-corp or Can It Be an LLC, Partnership or S-corp?

The company must be a C-corp to create a ROBS. As long as you have money invested in a company via a ROBS, you must remain a C-corp. However, if you divest the money you invested and end your ROBS then, at that point, you can use any other business entity you’d like based on federal and state laws. Read our article to learn more about business structures.

Can I Change the Business to an LLC Later or Does It Have to Stay a C-corp?

As long as you have funds invested in the business, the entity must be a C-corp. This is due to your company retirement plan owning shares of your business. Only a C-corp allows something other than a person or legal business entity to own shares.

As the Business Owner, Do I Have to Offer the Company Retirement Plan to All Employees?

You must offer the retirement plan to all eligible employees. Without getting into the nitty-gritty of the law, the government does set minimum requirements on who is entitled to a company retirement plan. Generally speaking, an employee must be at least 21 years old, have worked for one year and have worked at least 1,000 hours during that time. Learn more at the DOL.

Do Employees Have to Be Provided the Opportunity to Purchase Stock in the Company?

Not unless you or other owners are given that opportunity. The legal requirement is that company stock has to be made “effectively available” to employees in the same way it’s available to the owners. While this will be in your initial part of your retirement plan, it can be removed before you have employees become eligible, if you desire.

However, company stock can only be purchased by the employees through the retirement plan. Since stock in new companies is usually illiquid (cannot be sold easily), most employees tend to avoid investing even when it is offered.

What Happens If the Business Fails?

If the business fails, you could lose the money you rolled over from your personal retirement account. When a business is forced to shut down the assets of the corporation are liquidated and used to buy back as many shares of stock owned by the 401(k) plan as possible. Any funds remaining in the 401(k) plan are placed into an IRA for the business owner’s benefit and both the plan and the corporation are dissolved.

Can You Pull More Money Out of Your Retirement Account Using Another ROBS Down the Road?

As long as you have $50,000 or more in another eligible retirement account, you can do another ROBS. It would be a separate transaction going into the same business entity. This particular type of situation is very personalized to you. This is why we recommend having a free one-on-one consultation with an experienced ROBS provider, so you can get all of your specific questions answered.

Who Is Actually Holding the Retirement Accounts?

The actual cash accounts are held by a custodian, which is typically a brokerage firm such as Fidelity or TD Ameritrade. In general, the cost of having a custodian hold the retirement accounts is negligible or free. The brokerage firms make their money through their normal charges for buying or selling stocks, mutual funds and ETFs.

Can a ROBS Be Used to Purchase Real Estate?

A ROBS can’t be used to directly purchase real estate but can be used to provide working capital for C-corp that invests in real estate. ROBS can be used to fund businesses that buy raw land, income-producing property or developable land. Some of the profits can be distributed to ROBS in the form of dividends.

How Many People Can Invest in a Business Using a ROBS?

There is no maximum. Anyone using their own ROBS to invest must be a legitimate employee of the business. It is fairly common for multiple business partners to invest in the same business using a ROBS. You can also take funding from as many other sources or investors as you would like to as direct investments outside of this transaction.

Can Two People Combine Their Own ROBS Together to Buy a Business?

Two people can combine their ROBS to buy a business. However, to keep money separate you may want one individual to invest in a 401(k) plan and another in a profit-sharing plan. The best solution depends on your individual goals and situation. Most ROBS providers offer one-on-one consultations to answer this kind of question.

Does the Business Owner’s Retirement Account Sell Shares or Get Paid Dividends?

Although it is not commonly done, should the corporation issue a dividend to shareholders, the 401(k) plan gets its proportionate share of the dividend since it is a shareholder of company stock. The more common practice is for the business owners to pay themselves bonuses and higher salaries as the company starts generating excess cash flow.

As for selling shares, if the company is sold, the retirement account(s) holding shares will get payment in exchange for the shares it held. Also, the corporation can offer to buy back (“redeem”) shares from the plan, which provides another way to increase the cash in a retirement account.

Can I Use Additional Financing with a ROBS?

Many forms of financing, such as equipment financing, can be used with a ROBS to give the business more capital to work with. The most popular option is getting an SBA loan to handle any additional capital requirements your business may need.

A ROBS can also be used as a down payment for other financing. In fact, most ROBS providers will help you obtain additional startup financing if you need it but many charge for this service.

How Is a ROBS Different from an ESOP?

A ROBS is used by incorporating a new company and forming a 401(k) under that new company. Owners then transfer in retirement assets from other accounts and use that money to fund their new business. An employee stock ownership plan (ESOP), on the other hand, is structured to facilitate the purchase over time of a company’s stock by its employees. In an ESOP, funds are used to cash out the original company owners rather than to fund a new business.

The Bottom Line

A ROBS can be a great option for funding a small business, whether you’re just starting out, want to buy a business or recapitalize your current business. Ultimately, you should weigh all the pros and cons of a ROBS and get all your questions answered by a professional before deciding if it’s right for you.

Ultimately, you should weigh all the pros and cons of a ROBS and get all your questions answered by a professional before deciding if it’s right for you. If you have $50,000 or more in your retirement account, you qualify for a free, no obligation one-on-one consultation with a ROBS expert.

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