Rollover for Business Startups (ROBS): The Ultimate Guide

A rollover for business startups (ROBS) allows you to invest retirement funds from 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, a ROBS can be complicated, so 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 you can get a free, no-obligation consultation from one of the top ROBS providers in the industry.

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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 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 from other retirement accounts and invest those funds directly in your new business. However, using a ROBS requires you to follow specific rules that govern how the account is set up, managed, and ultimately unwound.

A rollover for business startups 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% penalty for the money you withdraw. Using your 401(k) to finance a business via ROBS offers advantages that aren’t available when borrowing against your 401(k) for other purposes which are limited, require repayment with interest, and may require employer approval.

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 the ROBS 401(k) rollover is completed and your startup is capitalized.

Completing this process on your own would be complicated and hiring accountants and attorneys to assist you can be expensive and time-consuming. Setup doesn’t just require you to file some paperwork. There are guidelines for how the account needs to be managed. Working with one of the experienced ROBS providers gives you the confidence to focus on your business while they handle the rest.

The five steps involved in setting up a ROBS correctly are:

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 complete. This means that a C-corp is the only business structure that can sell shares of the business to a retirement account legally.

This also means that a ROBS won’t work for many common legal entities like a limited liability company (LLC), a sole proprietorship, limited liability partnership, or an S corporation (S-corp). If your business is already operating as legal business entity other than a C-corp, you can convert your business entity to a C-corp to enable you to utilize a rollover for business startups.

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 some retirement plan options, depending on how many employees you expect to qualify for the 401(k), how many highly-compensated employees are expected, and other business-specific factors. All of these factors would be discussed during a free consultation with a ROBS provider.

Some of the most popular retirement plans small businesses use to set up a ROBS include:

• 401(k) plan
• Profit sharing plan
• Defined benefits plan
• Defined contribution plan
• A combination of plans like 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 Charles Schwab. Most ROBS providers don’t offer those services but will help you find a custodian to work with, and that 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 ROBS 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. Typically, this transfer is 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 of a ROBS IRA or 401(k) transaction is to use the funds in your new retirement plan to purchase stock in your new C-corp. To do this, the business has to issue ownership shares of the corporation.

In general, the number of shares that are assigned to the retirement plan equals the percentage of funding the plan is providing for the business. The percentage of startup financing the retirement plan is providing won’t always equal 100%. That’s because a ROBS can be used in conjunction with another financing method like Small Business Administration (SBA) loans, personal savings, or additional partners and outside investors.

You might not want to issue 100% 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. 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 account is set up. This includes a number of reporting requirements outlined by the IRS and United States Department of Labor (DOL). 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 transaction 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. Qualifying for a ROBS requires you to have enough funds in your retirement account to make the transaction worth it, and you’ll need to be compliant with certain government 401(k) rollover rules.

1. Hold an Eligible Retirement Account That Is Current

To use a ROBS, your funds must currently be held in a qualified, tax-deferred retirement account. Unfortunately, this means that 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 eligible for a ROBS transaction 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 that you have at least $50,000 available in retirement savings. While this is not a strict rule, anything less than $50,000 usually means that the ROBS costs are likely to be prohibitive. Most ROBS providers won’t be willing to work with you if you’re trying to roll over less than $50,000 for this reason.

If you don’t have $50,000 or more in retirement funds, you can still complete a rollover 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. Have a Retirement Account From a Prior 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.

However, you can 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 employer’s.

4. Be a Legitimate Employee of the New Business

To use a ROBS 401(k) you are required to be a legitimate employee of the business you’re investing in. There is no minimum time you must work in your new business each year. However, a thousand or more hours per year is usually a good rule of thumb. This means that a rollover for business startups may not be a good option for absentee owners or 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 rollover for business startups. 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 it’s the right decision for you.

Using a ROBS to Recapitalize a Business

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.”

— Katie Burckhardt, Senior Vice President of Sales, 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 that is losing a lot of money. One tip for using retirement funds to start a business is 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 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 typically a better solution.

Top providers, like Guidant Financial, typically charge you two fees — a setup fee and an ongoing monitoring fee.

1. ROBS Setup Fee

A ROBS provider charges approximately $5,000 upfront for a rollover business startup transaction, 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 account through a provider like Guidant Financial. This includes setting up the C-corp, conducting a valuation of the business, creating 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. This ensures that your ROBS transaction is following all the 401(k) rollover rules.

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% of your funding. Considering that most startup loans have origination fees of less than 4%, this level of expense is generally deemed too costly.

It’s possible to avoid some of these fees if you complete a ROBS transaction 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 your account unless you’re experienced and understand 401(k) rollover rules.

What’s more, you would likely need to hire individual attorneys and certified public accountants 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 of 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 careful to avoid ROBS prohibited transactions. Some prohibited transactions in a ROBS 401(k) include excessive ownership compensation and the use of business property for personal benefit. Prohibited transactions can expose you to unanticipated taxes and penalties.

Personal Use of Business Property

If you use a ROBS 401(k) rollover, you aren’t allowed to use any property of the business personally. Internal Revenue Code section 4975 places a 15% 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 rollover for busines startups, 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 using a rollover for business startups, 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.”

According to Holly Bejar, vice president of operations and plan administration at FranFund:

“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.

“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, there are additional 401(k) rollover rules and 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%, 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

A ROBS is 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 rollover for business startups (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 company 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 to ensure you are following 401(k) rollover rules—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. This means that 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, 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 top ROBS provider that is experienced at both setting up a ROBS and getting its clients successfully through audits.

Government Audits of ROBS

Rollovers for business startups (ROBS) are held to certain compliance standards by both the IRS and 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% of its clients were audited in 2018.

If you do face an audit, some 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 401(k) rollover 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 Using a ROBS

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 there is an outstanding loan balance, 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)

Using a ROBS to fund a company has some great benefits. You’re able to access retirement funds without paying income taxes or early withdrawal penalties and fund your business without debt or interest payments. Without a debt burden, your business success rate is also higher and, as your business grows, so does your retirement account.

1. No Interest or Debt Payments

It can be difficult and expensive to obtain capital to start or purchase a business. Many small business lenders charge interest rates that are more than 55% per year. This is especially true for startups. A rollover for business startups 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.

2. 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 to make debt payments. About 81% of Guidant Financial clients are still operating after four years or have successfully sold their businesses whereas the standard is around 39%.

3. No Income Taxes or Early Withdrawal Penalties

If you were to take a withdrawal for using retirement funds to start a business, you would have to pay income taxes and, if you’re age 59 1/2 or younger, early withdrawal penalties. The penalty is typically 10% of the amount withdrawn. By structuring your funding as a rollover, you avoid these costs.

4. 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.

5. 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)

When funding a business with a ROBS, there are also some potential drawbacks. You are risking your retirement funds on your business, and not every business is successful. You also have to operate as a C-corp, follow detailed procedures when managing your account, and there is a small risk of being audited by the IRS.

1. 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.

2. You Could Be Audited

A rollover for business startups 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 increased risk is small.

With Guidant Financial, for example, fewer than 0.35% 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.

3. You Need to Administer a Retirement Plan

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

4. Your Business Must Operate as a C-corp

It’s only possible to do a ROBS if your company is structured as a C-corp. 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, but you can get help to make sure everything is set up correctly.

To take advantage of the benefits while managing the risks of using 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 401(k) will depend on how you’re exiting your business—selling stock or assets or going bankrupt.

There are several real scenarios to consider when unwinding a ROBS.

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 first to pay off liabilities and administrative obligations. The net proceeds remaining after those payments are then distributed to the owners of the business, including your retirement plan.

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 transaction, you need to file a final Form 5500 for the year your plan was terminated to stay in compliance with 401(k) rollover rules.

ROBS vs Business Loan for Startup Funding

The most common way to fund a business is to get a business loan, which can 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 transaction 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.

When deciding between a ROBS and a business loan, there are four things to consider.

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 in a ROBS transaction. 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 rollover for business startups, 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 startup loans 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 rollover for business startups and business loans are 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 to $500): Setting up a ROBS requires using a C-corp; filing fees that vary by state
• ROBS setup fee ($4,000 to $5,000): ROBS providers typically charge fees to help set up your plan
• ROBS maintenance fees ($100 to $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 to $400): Many lenders charge a small fee to apply for a loan
• Business loan closing fee (0.1% to 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% to 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 (FAQs)

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 the FAQs below, you can ask us a question in our Fit Small Business 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 a business. However, most ROBS transactions are done to fund new businesses. You can choose to use the funds in your retirement directly or apply them as a down payment on a larger loan like an SBA loan.

According to Guidant Financial, here’s the approximate breakdown of how ROBS funds are used:

• Start a new business: 65%
• Buy an existing business: 20%
• Recapitalize an existing business: 15%

Does the company have to be a C-corp or can it be an LLC, partnership, or S-corp?

The only business structure you can use for a ROBS is a C-corp. 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 and unwind your ROBS, you can use any business entity you’d like based on federal and state laws.

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. The DOL 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.

Do employees have to be provided the opportunity to purchase stock in the company?

Not unless you or other owners have that opportunity. The requirement is that company stock has to be made “effectively available” to employees the same way it’s available to 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―can’t be sold easily―most employees tend to avoid investing even when it is offered.

What happens if the business fails?

When a business fails, the assets 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 transaction. It would be a separate transaction and depends on your personal situation. That’s why we recommend having a free one-on-one consultation with an experienced ROBS provider so that you can get your specific questions answered.

Who is actually holding the retirement accounts?

The actual cash accounts are held by a custodian that’s typically a brokerage firm like 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 purchase real estate directly but can be used to provide working capital for a C-corp that invests in real estate. A ROBS can be used to fund businesses that buy raw land, income-producing property, or developable land. Some 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 number of people that can invest in a business via ROBS. It’s common for multiple business partners to invest using a ROBS. However, anyone using a ROBS to invest must be a legitimate employee of the business. You can also take funding from investors as direct investments outside of this transaction.

Can two people combine their own ROBS 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 since it is a shareholder of company stock. A 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 or accounts holding shares will get payment in exchange for the shares it held. Also, the corporation can offer to buy back or “redeem” the 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 of the top ROBS providers will help you obtain additional startup financing if you need it. However, many companies 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. 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 a ROBS owners transfer in retirement assets from other accounts and use that money to fund their new business. However, In an ESOP, funds are used to cash out the original company owners rather than to fund a new business.

Can I start a business with my 401(k)?

There are three primary ways to start a business using your 401(k). You can utilize a rollover for business startups (ROBS), borrow against your retirement savings, or cash out your 401(k). Each of these options has specific requirements pertaining to when and how you can use the funds for your business.

Can I take money out of my IRA to start a business?

There are many rules surrounding IRAs and when funds can be withdrawn and for what purposes. Withdrawing IRA funds to start a business may involve penalties and require you to pay taxes on the withdrawn funds. However, if you have a self-directed IRA, you can choose your own investments, allowing more latitude in this regard.

Can a ROBS be used to finance a franchise?

A ROBS is a popular way to start or buy a franchise. In fact, more than 60% of 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 considered before deciding if it’s right for you.

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.

While doing your research and preparing for a ROBS is important, it is impossible to replicate the experience of doing thousands of ROBS transactions. 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 to help you understand your options.

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