Rollovers as Business Startups: Is a ROBS Your Best Funding Option?

Priyanka Prakash

Staff Writer at Fundera
Priyanka is a small business and finance staff writer at Fundera. Previously managing editor at Fit Small Business, she's also a licensed attorney who served as general counsel at a Y Combinator tech startup. She loves helping small business owners launch, run, and grow their businesses.

You often read in the news that Americans aren’t saving enough for retirement. Although a significant percentage of Americans have little or nothing saved for retirement, there’s also some good news. More than one third of Americans have $50,000 or more in retirement savings.

For entrepreneurs, this is especially great news. Rollovers as Business Startups (ROBS) are a business financing option for those who have at least $50,000 in a 401(k), traditional IRA, or other eligible retirement account.

Many people are familiar with 401(k) loans and early distributions, but a ROBS is different. A ROBS is neither a business loan nor a withdrawal of retirement funds. Rather, a ROBS lets you invest your own retirement savings in the growth of your business, without having to worry about debt and interest payments.

Sound too good to be true? The biggest downside to ROBS is that you could lose your retirement savings if the business fails. Even if you’re willing to take that risk, setting up a ROBS can be difficult. There are a lot of legal rules—and if you run afoul of them, you and your business can face some hefty financial penalties. Here’s everything you need to know to decide if a ROBS is right for you, including eligibility, the setup process, and cost.

Am I Eligible to Use a ROBS to Fund My Business?

When you’re looking to start or grow a company, you’ll probably come across multiple startup financing options. Many business owners consider a business loan, but other entrepreneurs prefer to bootstrap their business with their own money. A ROBS lets you tap into your own retirement savings to grow your business.

Usually, if you take money out of a retirement account before the age of 59½, the IRS charges an early withdrawal penalty. The IRS has created a special exemption for ROBS. But to qualify for ROBS, you need to meet a series of eligibility requirements.

These are the four main eligibility requirements for ROBS:

  • 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
  • Owner must be an employee of the business and receive a salary
  • Must either have your business structured as a C-corp or be willing to switch to a C-corp structure.

If you meet these requirements, you’re ready to get started with a ROBS, but the setup process can be complicated. Next, we’ll look at the steps you have to follow to set up your rollover.

→TL;DR (Too Long; Didn’t Read): Rollovers as Business Startups (ROBS) let you tap into retirement savings to start, acquire, or grow a business. You’re eligible if you have at least $50,000 in an eligible retirement account, are a salaried employee of the business, and either have a C-corp or are willing to convert to one.

rollovers-for-business-startup-robs

Should You Fund Your Business With a ROBS? Pros and Cons

A ROBS can be a flexible, debt-free way to launch or grow your business. But there’s a significant amount of risk in using retirement funds for anything other than… well, retirement.

Here are some of the advantages and disadvantages of ROBS:

Pros of a ROBS

  • No debt or interest. A ROBS isn’t a loan, so you won’t have any debt or interest to pay back. That’s a huge win, as there won’t be any debt eating into your cash flow. 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. A 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.

Cons of a ROBS

  • Puts your retirement savings at risk. If your business fails or sales decline over the long-term, you will lose your retirement savings.
  • Increased chance of IRS audit. The government closely scrutinizes ROBS transactions, so there’s a slightly elevated audit risk if you do a ROBS.
  • C-corp legal compliance – When you do a ROBS, you have to structure your business as a C-corp. This comes with more onerous legal and financial requirements, compared to sole proprietorships, partnerships, and LLCs.
  • Planning and administration can be difficult. After setting up a 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 2 to 3 weeks on average, but you can get funding through other quick business loans in as few as 24 hours.

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

For Jan Morris and her husband, who own The Hardware Distillery in Hoodsport, Wash., the advantages trumped the risks. Here’s how the couple thought through the pros and cons:

We own a distillery on the Olympic Peninsula. When we started the business six years ago, we put nearly 85% of our retirement savings into the business, through a Rollover as Business Startup.  

We initially tried getting a business loan through the bank, but first, the banker who was helping us got fired. And there was so much paperwork that we would have had to submit. So we opted for a ROBS. Guidant Financial helped us through the ROBS process.

Putting almost all our retirement funds into the business was a huge risk, and we should have had a Plan B in case things didn’t work out. But we didn’t . My husband said we drove our truck off the cliff and saw if we landed. Although that was risky, in hindsight, we’re happy with the way things turned out. We know other distillers in the area who have struggled with large loans and high interest payments. Using our retirement money has given us a lot of financial freedom.

→TL;DR: One of the biggest advantages of a ROBS is that you are utilizing your own savings. Debt and interest payments won’t eat into your cash flow. And you don’t have to worry about credit checks. But if your business fails, then you can lose your retirement savings.

How to Set Up a ROBS: Step-by-Step Instructions

Setting up a ROBS takes 2 to 3 weeks on average. But after that, the process isn’t over. As long as your business is active, there are steps you’ll need to take annually to ensure that you’re in compliance with IRS rules.

Here are steps for setting up a Rollover as Business Startup (ROBS):

Step 1: Find a ROBS provider to assist you.

Although you can do a ROBS yourself, we highly recommend finding a financial company to help you with setup and maintenance. The IRS’s guidebook on ROBS is over 6,000 words long! And the IRS isn’t the only government agency in the picture. Since ROBS involves the creation of a company retirement plan, you’ll also need to abide by Department of Labor regulations.

In other words, the initial setup for ROBS, as well as ongoing compliance, is complicated! An experienced ROBS provider can save you tons of time and money.

These are some of the most reputable ROBS providers:

  • Guidant Financial: Guidant Financial is a highly experienced ROBS provider. They’ve helped upwards of 10,000 entrepreneurs put more than $3 billion of retirement funds toward business growth.
  • Benetrends: Benetrends pioneered ROBS funding in 1983 and is also 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.

Step 2: Form a C-corporation.

Business owners who want set up a ROBS must structure their company as a C-corporation. This is because ROBS involves 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 financial company, they will form your C-corporation for you or walk you through the rules in your state.

Step 3: Set up a retirement plan for yourself and eligible employees.

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.

Step 4: Roll over funds from your old retirement account to your new retirement account.

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 roll over at least $50,000 worth of funds, and there’s no upper limit.

Step 5: Sell your company’s stock to your retirement plan.

Remember when we said earlier that a C-corp is the only entity that works for ROBS? The reason is that C-corporations can sell stock to a retirement plan.

You’ll need sell shares to the retirement plan proportional to the amount of 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.

As we’ll discuss in more detail below, 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.

Step 6: Use the funds.

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.

→TL;DR: To complete a ROBS, you have to form a new C-corp and company retirement plan. The retirement plan then purchases stock in the C-corp. You can use the money resulting from the sale to start or grow a business. We recommend hiring a professional ROBS advisor to help you through the process.

rollovers-for-business-startup-robs

Cost of a ROBS

A ROBS is very different from a typical business loan. With a business loan, you have to make periodic payments of principal and interest. Many lenders also charge fees. A ROBS offers debt-free financing, but there are other costs to be aware of.

These are two costs that ROBS providers will charge:

  • One-time upfront fee (approx. $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 (approx. $100 to $150). The monthly fee covers the administration of your retirement plan and annual IRS filings.

Should you decide to do a ROBS on your own, without the assistance of a provider, then your fees with be slightly lower. However, you would likely have to spend several hours figuring out all of the IRS’s rules and ensuring that you’re in compliance. The time you’ll save by using a provider makes up for the added cost.

→TL;DR: The upfront fee for ROBS is approximately $5,000, and the ongoing costs are approximately $100 to $150 per month. Costs are slightly lower if you do a ROBS yourself, but this is also much more time consuming.

Combining ROBS With Business Loans

One of the most versatile ways to use ROBS is by combining a ROBS with other types of business financing. You might not have enough money in your retirement account to meet your business’s funding goals. Or, you might not want to risk all of the money in your retirement account.

In that case, you can combine your ROBS with other types of funding:

Combining a ROBS with an SBA loan or bank loan is especially common. SBA loans offer low interest rates, long repayment periods, and affordable monthly payments. But they’re notoriously difficult to qualify for and often require up to 30% down from the borrower.

A ROBS lets you use retirement money to cover your down payment, letting you access SBA funding when you otherwise wouldn’t qualify. In addition, by combining multiple modes of financing, you can preserve some of your retirement savings. Spreading capital across different sources lowers the risk of losing everything if your business goes under.

→TL;DR: You can combine a ROBS with other types of financing, such as SBA loans, to safeguard more of your retirement funds.

Frequently Asked Questions about ROBS

1. What if the IRS audits my business after I set up a ROBS?

The IRS is more likely to audit a business that’s done a ROBS because there are many regulations to follow, and they want to ensure you’re in compliance. The Department of Labor can also send auditors to check your business’s compliance with labor and retirement regulations. Auditors will check if you set up the retirement plan correctly, are administering the retirement plan correctly, and filed all necessary paperwork with the IRS.

If the auditors find that you have not correctly set up your ROBS, they can invalidate the transaction. They’ll charge early withdrawal penalties, plus you’ll have to pay back taxes for every year that the ROBS has been active. Sounds scary, right?

Fortunately, the risk of an audit is extremely low. Fewer than 1% of business owners get audited for ROBS. And even if you do get audited, some firms like Guidant will pay for any legal fees or tax penalties that you incur.

Suzie and Todd Ford, owners of NoDa Brewing Company in Charlotte, NC, faced a ROBS audit. “If you happen to be the lucky random winner of an IRS audit (which we were),” says Suzie, “Guidant will hire an attorney to meet with the IRS agent and you for the audit. We complied with the rules and laws as required by IRS, as directed by Guidant, and came out with a perfect audit. We recommend using ROBS as long as you positively understand the risks.”

2. What are my responsibilities after setting up a ROBS?

Once you complete a ROBS, you’ll have an additional hat to wear as a business owner. You’ll also have to administer a retirement plan for your employees. All of your eligible employees must have the option to participate. In general, an eligible employee is anyone who is 21 years age or older and has worked at the company for at least one year.

You’ll have to notify employees when they’re eligible, allow eligible employees to make elective contributions to the plan, and take care of any employer tax obligations—your ROBS provider will handle some of these responsibilities for you if you use one, but you’re ultimately responsible for making sure you comply with tax rules.

The responsibilities of administering a retirement plan can be costly and time consuming. Jan Morris and her husband, the couple who used ROBS to start their whiskey distillery, said that this keeps them from hiring full-time employees. “We know that when we have full-time employees, we’ll have to administer a retirement plan for them. That’s a big deterrent to hiring for us.”

3. Must you have a C-corp, or can you choose another type of business structure?

You must structure your business as a C-corp. Under IRS rules, only this type of business structure can sell shares to a retirement plan. There might be multiple divisions in your company that are LLCs or S-corps. But the parent company must be a C-corp in order to do a ROBS.

4. What if I want to sell or close down my business after ROBS?

The easiest way to unwind a business after doing a ROBS is with a business stock sale. Each shareholder in the company will receive a portion of the sales proceeds once you’ve found a buyer and completed the transaction. You can roll the funds that your retirement plan holds into an IRA.

As an alternative to a stock sale, you can also choose an asset sale. In this scenario, you would sell off the business’s assets and pay all of the business’s liabilities and obligations. The owners, including your retirement plan (which owns a percentage of your company), will divide up the remaining proceeds.

5. Can I do more than one ROBS?

Yes. If you own more than one retirement account, and each of them contains $50,000 or more of funds, you can roll over both into your business using ROBS. There would be separate transactions for each retirement account. In addition, if there are multiple business partners, each with an eligible retirement account, you can roll over both accounts into the business. A ROBS provider can help you with these kinds of transactions.

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A ROBS Can Be a Versatile Business Financing Option

Rollovers as Business Startups (ROBS) can be a great way to fund your business, whether you’re just starting out, trying acquire a business, or are a veteran business owner.

Just keep these important points in mind if you’re attempting a ROBS:

  • You’re eligible for a ROBS if you have at least $50,000 in an eligible retirement account, are an employee of the business, and either have or are willing to set up your company as a C-corp.
  • A ROBS can be great because you don’t have debt or interest to pay back, and there are no credit checks. But the risks can be high. If your business doesn’t do well, you can lose your retirement savings.
  • During ROBS setup, you will form a C-corporation and set up a retirement plan for yourself and eligible employees. The retirement plan will buy stock in the company. The company can use the resulting funds for business purposes.
  • You can combine ROBS with other sources of funding, such as a bank loan or SBA loan.

A ROBS provider can be your best friend throughout the ROBS process. They will walk you through the complicated setup and maintenance process and ensure that your plan is in compliance with IRS rules. And remember, don’t forget to explore other financing options instead of a ROBS or in conjunction with one!

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Priyanka Prakash

Staff Writer at Fundera
Priyanka is a small business and finance staff writer at Fundera. Previously managing editor at Fit Small Business, she's also a licensed attorney who served as general counsel at a Y Combinator tech startup. She loves helping small business owners launch, run, and grow their businesses.

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