Selling a business that was purchased using ROBS
We bought a business using the ROBS plan, we paid $120,000 for the business. We ended up taking the remainder of the 401k to provide additional funding to the business. We have used the whole $250,000 that we had in the 401k We are in the process of trying to sell the business because we are losing money. If we are able to sell the business for $150,000, does that have to go into a 401k? Also would we owe early withdrawal penalties and taxes on any portion of the original $250,000?
Hi, Jen, and thanks for your great question! A ROBS is certainly a unique tool and can be very helpful for lots of people trying to start new businesses. We’re sorry to hear that your business didn’t work out this time, but we’re sure your next ventures will have better results.
Because people’s situations vary so widely, we don’t typically provide individual tax advice. However, from the situation you’ve described, it does sound like you would need to take some special steps to avoid owing taxes or penalties. Based on our reading, it seems more likely that $150k would be your taxable amount rather than $250k – if you don’t keep the proceeds from the sale of your business in your 401k. This is because, by using a ROBS, you didn’t actually take money from your 401k to start your business – the 401k owned the business. In other words, if you sell the business for $150k and that money doesn’t stay in your 401k, it would seem to us that THAT may be viewed as a distribution from your 401k. The $100k difference between your cost to set up the business and the sales price would more likley be viewed as a loss within your 401k.
Guidant Financial is one of our most highly recommended ROBS providers – they help people set up and administer ROBS businesses from start to finish. They actually have an article on their site that covers this situation directly and details some of the options open to you. You can read more here: https://www.guidantfinancial.com/401k-business-financing-robs-guide/how-to-exit-the-rollovers-for-business-startups-structure/
Hope this helps. Best wishes for your future ventures.