A rollover for business startups (ROBS) enables you to access your retirement funds to start or buy a business. Setting up a ROBS involves rolling your existing 401(k) into a new C corporation’s retirement plan. The new business then purchases shares in the new company with those funds and gives you access to them.
However, to set up a ROBS, you need to follow a complex procedure to avoid taxes and early withdrawal penalties. We recommend getting a free initial consultation with an independent attorney through Guidant. It will set up your ROBS and get you funded in as little as three weeks and handle ongoing maintenance and audits.
How to Set Up a ROBS in 8 Steps
Setting up a ROBS can be complicated, but ROBS providers take care of most of the hard work for you. If you are unfamiliar with ROBS, read Rollover for Business Startups (ROBS): The Ultimate Guide and then return to this article. If you are ready to move forward, you can choose one of the best ROBS providers.
1. Determine if a ROBS Is Right for You
A ROBS is a good option for your business if you don’t want to worry about traditional underwriting criteria for financing like credit checks and collateral. However, you will need to have an eligible retirement account not from your current employer and at least $50,000 in the account to make the transaction financially viable.
For your retirement account to qualify for a ROBS, you’ll need to meet three criteria.
You Need to Have an Eligible Retirement Account Type
Most of the common retirement accounts can be used for a ROBS, including a 401(k), 403(b), and traditional individual retirement account (IRA) accounts. There are some accounts that cannot be used for a ROBS like a Roth IRA. If you are unsure if your account qualifies, we recommend checking with a ROBS provider.
A provider like Guidant works with a wide range of retirement accounts, including:
- Simplified employee pension (SEP) IRA
- Thrift savings plan (TSP)
- Traditional IRAs (Roth IRAs are not eligible)
You Need at Least $50,000 in Your Retirement Account
Most providers will require a minimum of $50,000 in your retirement account to do a ROBS. This is because the initial fees are approximately $5,000 and you will have to pay additional maintenance as well. This makes rolling over less than $50,000 less cost-effective when compared to other small business loans for startups.
Your Retirement Account Can’t Be From a Current Employer
Most employers 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. If your only retirement account is with your current employer, you can still use your 401(k) to fund your business by borrowing from it or cashing it out.
2. Request a Free Consultation With a ROBS Provider
Once you determine that a ROBS could be a good fit for you and your business, you should speak to a ROBS professional. Each ROBS plan is unique and structured to meet the demands of your own business and personal situation. You can request a free consultation with the ROBS provider you choose.
3. Speak to a ROBS Consultant
Once you request a consultation, a financing consultant will call you within one business day to answer any questions and make sure a ROBS is a good fit. If you qualify and a ROBS is the best financing option for you, the consultant will then arrange a time for a longer, more detailed call.
If you are confident in the provider you have chosen and are certain that a ROBS is the best choice, you will be asked to submit some information to your provider. As the screenshot below shows, Guidant requests some basic retirement plan and business information to pair you with the best advisor for your needs.
4. Pay the ROBS Set-up Fees
Your initial payment to set up your ROBS 401(k) is due at this stage. You will be required to pay the $4,995 setup fee and the first month’s fee of $139. If you later decide that a ROBS is not for you, some providers offer a generous money-back guarantee.
For example, through Guidant, you will be refunded your setup costs minus any hard costs, such as attorney time and corporate filing fees, which will be deducted from the refund should you choose to back out. Katie Burckhardt, senior vice president of sales at Guidant, says people often see 80% of fees refunded if they choose not to complete their rollover.
5. Establish a C-corp & File IRS Paperwork
To do a ROBS, your business has to be set up as a C-corp, because the rollover involves a sale of stock to a retirement account. Your provider will typically submit the required filings with your state To set your business up as a C-corp if it is not already structured as a C-corp. They will also file all required paperwork with the IRS.
6. Get Questions Answered by Two Independent ERISA Attorneys
ROBS is regulated by the Employee Retirement Income Security Act (ERISA). Speaking to an independent ERISA attorney gives you the opportunity to ask questions and evaluate if a ROBS is a good fit. Guidant is the only ROBS provider we know of that gives you access to independent counsel before and during the ROBS process.
With Guidant, you will typically have two one-hour consultations with independent ERISA attorneys, at no additional cost to you. If you use a different provider, you can expect to skip this step. To get the most out of your consultation, you should have some questions prepared before you begin.
Some questions to ask the lawyers include:
- Do I face an increased audit risk if I do a ROBS?
- What happens in the event of an audit?
- How much salary do I have to pay myself if I am doing a ROBS?
- How many hours do I have to work if I am doing a ROBS?
- Will my employees be able to purchase stock in the business?
- Will my company need to be appraised before shares can be issued?
- What will happen to the company retirement account if the business fails?
On rare occasions, the independent counsel will discover something about your business or retirement account that invalidates the deal. In that case, you would get a full refund. This is why it is important to have the discussion with independent counsel. Some of the most common questions asked by business owners are answered in our ROBS ultimate guide.
7. Create a New Retirement Plan for the Corporation
Creating a new retirement plan for your corporation is an important step in setting up a ROBS. You will need to ensure that your retirement plan is compliant with all of the current laws and regulations set by the IRS and the United States Department of Labor.
You will work with your ROBS provider to design a plan that works for your business and goals and is open to all eligible employees. Employee eligibility will vary based on how the plan is set up. Afterward, the plan will be assigned to and managed by a third-party administrator (TPA).
Once you have selected a TPA, they will typically:
- Set goals: The TPA will work with you to understand your retirement plan and set appropriate goals for the 401(k)
- Offer investment funds: Once your goals are understood, the TPA will develop investment funds based off of these goals
- Handle day-to-day operations: They will then handle all of the day-to-day operations of the 401(k), including working with any employees who wish to customize their investment strategy
These services are not unique to using a ROBS and are offered by many major banks. Even if you are not using a ROBS to fund your business, you would use a TPA if you were going to offer a 401(k) plan to your employees. Your ROBS provider will be able to make informed suggestions on the best TPA for you based on their experience.
8. Complete Rollover & Access Funds for Your Business
The final step of setting up a ROBS 401(k) is the rollover of funds. Your personal retirement funds are transferred into the company retirement plan. Your company retirement plan then purchases shares of stock in the corporation. From the proceeds of the stock purchase, you can start a new business, buy a business, or recapitalize a business.
A ROBS may be your best option for funding your business transaction. You will need at least $50,000 in your retirement account to set on up with a provider. You can simplify the process by working with Guidant, who provide a free consultation and can get you funded in as little as three weeks.
ROBS Administration After Setup
Once your ROBS is set up correctly, you will be required to fill out an IRS Form 5500 every year that your retirement funds are invested in your business. These forms can be complex and exact requirements will vary. For a small fee, a ROBS provider like Guidant will manage this for you.
Besides your annual filings, employees may become eligible to participate in your company’s retirement plan. This may require that certain notices be made available to them and increase the burden of paperwork further. Your ROBS provider will work to keep track of the required notices and filings and submit them on your behalf to ensure your business is in good standing with the IRS.
While it may seem difficult to keep track of and manage your ROBS as your business moves forward, it is not. Having the right ROBS provider makes this as simple as possible, leaving you more time to focus on your business.
Why We Recommend Guidant
We recommend Guidant as the best overall ROBS provider for many reasons. Since 2003, more than 18,000 small businesses have trusted Guidant to do a ROBS, totaling more than $4.4 billion in funding. It is also well-versed in setting up your ROBS correctly and has never had a plan disqualified during an audit.
Three of the most important reasons why we recommend Guidant are its customer service, level of expertise and ease of setup process.
Excellent Customer Service
You will work one-on-one with a Guidant consultant during the ROBS setup process. Many Guidant consultants have banking experience, have worked for a small business, or owned a small business in the past, so they are well-equipped to answer questions and simplify the process for you.
High Level of Expertise
Guidant completes more ROBS 401(k) transactions every year at around 1,600 than any provider we have reviewed. It also has a lower percentage of its customers audited last year than any other provider, and it has never had a plan disqualified during an audit.
All of this points to its long history of experience and high level of expertise in the ROBS space. Guidant is a provider you can trust to get you off the ground with a ROBS, and then see it through with your business until the end.
Access to Independent Counsel During the Setup Process (No Cost)
Guidant is the only ROBS provider we know of that provides access to independent outside counsel at no additional cost during setup. Independent counsel can help you objectively evaluate the legal and tax risks of a ROBS and determine if it is a good choice for your business.
To learn more about why we recommend Guidant and how it compares to other ROBS providers, check out our guide on the best ROBS providers. See for yourself by scheduling a free, no-obligation consultation with one of its ROBS experts.
Costs to Setting Up a ROBS With Guidant
There are two primary costs associated with setting up a ROBS with Guidant. The first is the setup fee, $4,995 payable when you start the process, from a non-ROBS source. The second is the ongoing monitoring fee, $139 per month, payable on an ongoing basis for the maintenance and service of your ROBS account.
There are two main fees for setting up a ROBS with Guidant:
- Setup fees: $4,995; cannot come from ROBS money
- Ongoing monitoring fees: $139 per month; covers 10 employees, then $3.33 per month for each additional employee after 10
While these fees may seem high, setting up a ROBS with Guidant can be much more economical than getting a small business loan. Business loans are debt that you have to pay back, along with interest, bit by bit each month.
ROBS vs Other Types of Financing
The interest charges on a loan impact your business revenues. However, ROBS is not a loan there is no debt or interest to pay back and, if your business grows, the stock that is in your company-sponsored retirement account will also grow. That translates to more retained earnings and retirement savings for you.
Below is a comparison from Guidant that looks at the cost of ROBS versus other types of financing for $125,000 in business capital. As you can see, the monthly payment for a Guidant Financial ROBS is just $139 for a company of 10 people. That is less than 1/10th of the monthly payment on a Small Business Administration (SBA) loan.
ROBS Pros & Cons
Whether you choose Guidant or another firm to help you set up a ROBS, you will face certain risks and restrictions. The biggest risk is the loss of your retirement funds if the business fails. However, ROBS also has many advantages over other small business financing options including no interest payments and limited downside.
There are several benefits and risks to consider when setting up a ROBS.
Pros of a ROBS
Some of the advantages of using a ROBS 401(k) to finance your business include:
- No income taxes or early withdrawal penalties: Unlike cashing out your 401(k), a ROBS allows you to use your retirement funds without incurring the usual costs associated with early withdrawal
- No debt: When you fund your business with a ROBS your business does not have any debt; this gives you the option to avoid debt altogether or seek additional financing for your business
- No loan payments: Loan payments can be a burden on your company’s cash flows; this is especially important if you are starting a new business and can increase your chances of success significantly
- No credit checks or personal guarantees: Setting up a ROBS is one of the options that allows you to get financing without a credit check; you also avoid providing any personal guarantees which allow you to control your risk
- Retirement funds can grow in a tax-advantaged account: Because your business is owned by your retirement account, your business earning directly contribute to your tax-advantaged retirement account
Cons of a ROBS
When setting up a ROBS 401(k), it is important to consider the following risks:
- The possibility of business failure and loss of retirement funds: You are using retirement funds to start a business and not every business venture is successful; if your business fails, you will lose your retirement savings
- Potential to be audited: ROBS transactions are heavily scrutinized and may increase your chances of being audited; selecting a ROBS provider that will provide legal counsel in the event of an audit can give you the peace of mind to run your business
- Must administer a company retirement plan: Following the requirements set forth by the IRS and the U.S. Department of Labor can add an extra operational burden to your business
- Must operate as a C-corp: You are restricted to operating as a C-corp if you choose to fund your business with a ROBS, which prevents you from using other business structures for your company
Why a ROBS Is Beneficial for Your Businesses
Working with a professional ROBS provider like Guidant can reduce the complexities that are inherent to ROBS 401(k) financing. Although there are risks in any business venture, companies funded by ROBS tend to be more successful to the reduced debt burden and simple initial qualifications.
For Richard Hoad and his wife Jo-Anne, owners of The Parsonage Inn in Cape Cod, Massachusetts, the risks were worth it. The Hoads did a ROBS with Guidant in 2012 to achieve their dream of owning a bed and breakfast (B&B).
Richard Hoad said:
“My wife and I were relatively confident because the inn was already being run as a business. It was underperforming, but Jo-Anne’s family had run a B&B in the past, so we knew what was involved and how we could make it successful. We put all our eggs in one basket, but the economy was starting to grow, we got the inn for a good price, and we knew what we could do to be successful.”
Four years later, the Hoads have nearly doubled the inn’s revenues. Richard Hoad had some words of advice to offer for other small business owners who may be considering a ROBS:
“Look at your business plan, make it realistic, see what you want to do with the business and make sure you can achieve it. If the fundamentals of the business are strong and you’re confident in what you can do to add value, that’s what’s important.”
Richard Hoad also recommends business owners use the services of a professional firm like Guidant that will walk them through the process:
“Guidant was very professional and helped us accomplish our goals, and they continue to do so to this day.”
How to Set Up a ROBS: Frequently Asked Questions (FAQs)
In this article, we have explained the steps involved in setting up a ROBS. However, a ROBS is complex, and there are often additional questions, we have tried to address those here. If we have not answered your question, feel free to share it with us in the FitSmallBusiness forum, and we will provide an answer.
Here are the most frequently asked questions about how to set up a ROBS.
What Can a ROBS Be Used for?
A ROBS is often used to start a new business, and according to Guidant, more than 60% of the time this is what the funds are used for. However, a ROBS can also be used to finance the purchase an existing business or even recapitalize a business.
Can I Use Additional Financing With a ROBS?
Additional financing is very commonly used in conjunction with ROBS to give businesses more capital to work with. The most common source of additional capital is an SBA startup loan. However, unsecured loans are also used. Your ROBS provider will often be able to assist you in applying for this additional financing.
How Long Does it Take to Set Up a ROBS?
Setting up a ROBS on your own can take more than a month, depending on how much outside help you hire. However, if you are working with an experienced ROBS provider, you can get funded in as quickly as two to three weeks, with far less hassle and much fewer risks.
What Are Some ROBS Transactions Prohibited by the IRS?
How you use the money from a ROBS is restricted by the IRS. To avoid any issues you cannot use the business property for personal use, pay yourself excessive compensation, or disburse any of the money to promoters. You are also not allowed to fund a business that is considered illegal by the federal government.
The use of ROBS funds is regulated by the IRS. As such, there are some IRS ROBS prohibited transactions that are important to consider:
- Personal use of business property: The IRS imposes tax 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: Although there is no strict guideline the IRS looks for a lack of excess; furthermore, you will be unable to pay yourself directly with your ROBS funds
- Promoter fees: The people who help you raise money may be considered fiduciaries by the IRS; compensation of fiduciaries from your ROBS funds may, therefore, be a violation
- Funding illegal business: Although this seems self-explanatory, some businesses may be allowed by state law, but are considered illegal by the federal government; the IRS is federal and, therefore, your ROBS funds will need to comply with federal law
How Much Can I Pay Myself if My Business Is Financed With a ROBS?
When you use a ROBS for 401(k) financing, you owe a fiduciary duty to your retirement account. This means your compensation and benefits cannot be excessive, and you must draw your salary from operating revenue, rather than the retirement funds in your business. For additional compliance information see our article, Rollover for Business Startups (ROBS): The Ultimate Guide.
The Bottom Line
If you have at least $50,000 in your retirement account, doing a ROBS could be the right solution. Setting up a ROBS by yourself correctly can be difficult and time-consuming. That’s why we recommend using a ROBS provider to guide you through the process and handle maintenance of the account.
To protect your business and prevent any unexpected fees, we recommend using Guidant. With Guidant Financial you can receive two free one-hour consultations with an independent attorney to help you understand the process and make a decision. Once the process is started, it will take three weeks to get your businesses funded.