Rollovers as Business Startups (ROBS): The Complete Guide

Rollovers as business startups (ROBS) are an alternative form of business financing in which you’re allowed to use retirement funds to start, acquire, or grow a business. Unlike 401(k) loans or early distributions, however, ROBS are different. ROBS is neither a business loan nor a withdrawal of retirement funds.

Instead, ROBS lets you invest your own retirement savings in the growth of your business, without having to worry about debt and interest payments. That said, however, you also run the risk of losing retirement savings if your business fails.

Is ROBS right for your financing needs? Find out everything you need to know about rollovers as business startups here.

In This Guide

• How Does ROBS Work?
• Pros and Cons
• How to Set up ROBS
• Frequently Asked Questions

As we mentioned above, ROBS allows you to invest money from your retirement fund—like your 401(k) or IRA to finance a business. With rollovers as business startups, entrepreneurs who have at least $50,000 or more in an eligible retirement account can invest this money into their business without having to worry about debt and interest payments.

However, the process involved with setting up ROBS is not a simple one—and there are a number of legal and compliance rules to follow. In short, ROBS works like this:

• You form a new C-corporation and company retirement plan.
• You roll over your existing retirement accounts into the new retirement plan.
• The rolled-over funds are used to purchase stock in the C-corp.
• You can then use the money resulting from the sale to start or grow a business.

Usually, if you take money out of a retirement account before the age of 59½, the IRS charges an early withdrawal penalty. Luckily, the IRS has created a special exemption for ROBS.^[1] That said, to qualify for ROBS, you need to meet a series of eligibility requirements:

• Must currently hold an eligible retirement or pension account from a previous employer, such as a 401(k), traditional IRA, SEP, 403(b), Keogh, or TSP account. Roth accounts and retirement accounts from current employers are not eligible
• Must have $50,000 or more in the account
• The owner must be an employee of the business and receive a salary
• Must either have your business structured as a C-corporation or be willing to switch to a C-corp structure

As you can see, rollovers as business startups are very different from more traditional forms of business financing. Unlike business loans, ROBS offers debt-free financing, but—there are other costs to keep in mind:

These are two main costs that ROBS providers will charge:

• One-time upfront fee: Approximately $5,000
  • This initial fee covers the formation of your C-corp, setup of your retirement plan, initial IRS filings, and a business appraisal (when necessary).
• Monthly administrative fee: Approximately $100 to $150
  • The monthly fee covers the administration of your retirement plan and annual IRS filings.

Should you decide to do ROBS on your own, without the assistance of a provider, then your fees with be slightly lower. However, due to the compliance and IRS requirements associated with ROBS, we’d strongly recommend working with a professional ROBS provider.

The time and hassle you’ll save by using a provider will make up for the added cost.

Overall, rollovers as business startups can be a flexible, debt-free way to launch or grow your business. At the same time, however, there’s a significant amount of risk in using retirement funds for anything other than retirement.

With this in mind, let’s break down some of the advantages and disadvantages of ROBS.

• No debt or interest: Since ROBS isn’t a loan, you won’t have any debt or interest to pay back. This can be particularly beneficial as there won’t be any debt eating into your cash flow—instead, you can reinvest any profits back into the business.
• More control over your retirement funds: Instead of your retirement or pension funds sitting in a brokerage somewhere, you invest these funds in your own company. Your savings will grow (or decline) based on your own business’s performance.
• No early withdrawal penalties: Unlike other 401(k) or retirement financing methods, ROBS isn’t a distribution of retirement funds, so you don’t have to pay any penalties to the IRS.
• No credit check: Most business loans place heavy importance on credit history, but since ROBS isn’t a loan, there are no credit checks to worry about.

• Puts your retirement savings at risk: If your business fails or sales decline over the long-term, you’ll lose your retirement savings. Not to mention, you’re losing out on the potential gains you may have earned by leaving those funds in your retirement account.
• Increased chance of IRS audit: The government closely scrutinizes ROBS transactions, so there’s a slightly elevated audit risk.
• C-corp legal compliance: To do ROBS, you have to structure your business as a C-corp. This comes with more complex legal and financial requirements, compared to sole proprietorships, partnerships, and LLCs.
• Planning and administration can be difficult: After setting up ROBS, there are ongoing IRS rules that you need to comply with. These can be difficult to understand on your own, although a ROBS provider can take these matters off your plate.
• Slower than other financing options: The ROBS process takes two to three weeks on average, but you can get funding through other quick business loans in as few as 24 hours.

Ultimately, if you decide that the advantages of ROBS outweigh the disadvantages, the next step is to actually set up the transaction and get the funds.

With this in mind, here are the steps to follow for setting up a rollover as business startup:

Although you can do a ROBS yourself, we highly recommend finding a financial company to help you with setup and maintenance.

A ROBS provider can help you manage IRS guidelines and the Department of Labor regulations—saving you significant time and money.

Here are some of the most reputable ROBS providers you might consider:

• Guidant Financial: Guidant Financial is a highly experienced ROBS provider. They’ve helped upward of 10,000 entrepreneurs put more than $3 billion of retirement funds toward business growth.
• Benetrends: Pioneering ROBS funding in 1983, Benetrends is a very experienced provider.
• FranFund: FranFund specializes in helping people use ROBS to buy franchises.

Each of these companies has a long history of helping people with ROBS setup and compliance, so your choice ultimately depends on cost and customer service.

You can call any of these companies and talk to a representative about your business’s specific goals. They will walk you through their ROBS process and fees, with no obligation to purchase anything.

Next, you’ll need to structure your company as a C-corporation. C-corps are required for ROBS because they involve a stock purchase.

In most states, you can create a C-corp by filing articles of incorporation, drafting corporate bylaws, and appointing a local registered agent to accept service of process on your company’s behalf. For tax purposes, you’ll also need to apply for an employer identification number (EIN) for your C-corp.

If you work with a ROBS financial company, they will form your C-corporation for you or walk you through the rules in your state.

Once you set up your C-corp, you’ll need to create a retirement or profit-sharing plan for yourself and eligible employees. The financial company you’re working with will prepare a Retirement Profit Sharing Plan Adoption Agreement and Plan Administration Agreement.

Some, but not all, ROBS providers will help you find a custodian for your retirement account—like Merrill Edge, Vanguard, or Fidelity. If your ROBS provider doesn’t assist with this process, you’ll need to find a custodian on your own.

After your new C-corp and new retirement plan are in place, the next step is to transfer funds from your original retirement account into the new retirement account. You must rollover at least $50,000 worth of funds, and there’s no upper limit.

You’ll need to sell shares to the retirement plan proportional to the amount of startup funding that the plan is providing for the business. For example, if you want to fund 80% of your startup costs through ROBS, you’ll sell 80% of the company’s ownership shares to the retirement plan.

This being said, you’re free to use ROBS in conjunction with SBA loans, online loans, lines of credit, and other types of financing, so you might not use ROBS to fund 100% of your business’s expenses.

Your company will receive funds from the sale of stock. You can use that money to pay for startup costs, buy a business, or get working capital.

At the end of the day, rollovers as business startups can be a great way to fund your business—whether you’re just starting out, trying to acquire a business, or are a veteran business owner—but they’re not without risk to your retirement funds.

Therefore, before you opt for this form of financing, you’ll want to make sure you evaluate the pros and cons—as well as look into any alternate forms of funding that may be worth considering for your business.

Ultimately, however, if you do decide to use ROBS, remember that working with a ROBS provider can make the complicated setup and maintenance process much simpler.

Article Sources:

1. IRS.gov. “Guidelines Regarding Rollovers as Business Startups“
2. IRS.gov. “401(k) Plan Qualifications and Requirements“