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.
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:
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. That said, to qualify for ROBS, you need to meet a series of eligibility requirements:
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:
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.
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:
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.
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.
Priyanka Prakash is a senior contributing writer at Fundera.
Priyanka specializes in small business finance, credit, law, and insurance, helping businesses owners navigate complicated concepts and decisions. Since earning her law degree from the University of Washington, Priyanka has spent half a decade writing on small business financial and legal concerns. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup.