Rollover For Business Startups (ROBS)

Rollover for Business Startups (ROBS): The Ultimate Guide 12/5/19, 2(45 AM
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Rollover for Business Startups (ROBS):

The Ultimate Guide
By Tricia Tetreault on June 28, 2019 | Financing, Glossary, How To, ROBS, Startup Funding | Comments
(275)
A rollover for business startups (ROBS) allows you to invest retirement funds from a
401(k) or individual retirement account (IRA) into your business without paying early
withdrawal penalties or taxes. A ROBS isn’t a business loan or a 401(k) loan, so there’s
no debt to repay or interest payments to make.
Studies have shown that business owners who use a ROBS often see higher success
rates than those who rely on traditional business financing. However, a ROBS can be
complicated, so it’s important to consult with an expert to see if a ROBS would work for
your business. If you have $50,000 or more in a 401(k) or IRA you can get a free, no-
obligation consultation from one of the top ROBS providers in the industry.
Get Your Free Consultation
How a ROBS Works

A ROBS gives you access to your retirement funds to use in your business without
having to borrow or cash out. It can be used to fund a new business or franchise, buy
an existing business, or recapitalize your business. When you use a ROBS, your
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business retirement account owns shares of your new business.
A ROBS 401(k) involves incorporating a new business and opening a new 401(k) under it.
After setup is complete, you can transfer assets from other retirement accounts and
invest those funds directly in your new business. However, using a ROBS requires you
to follow specific rules that govern how the account is set up, managed, and ultimately
unwound.
A rollover for business startups isn’t a withdrawal from your retirement account or a
loan against it. Instead, it’s a rollover that invests directly in your business. Normally, if
you take money out of a retirement account before age 59 1/2, you have to pay income
tax plus a 10% penalty for the money you withdraw. Using your 401(k) to finance a
business via ROBS o"ers advantages that aren’t available when borrowing against your
401(k) for other purposes which are limited, require repayment with interest, and may
require employer approval.
A ROBS is a very specialized financing tool that is dependent on your personal

circumstances. Depending on your business, your retirement accounts, and what your
goals are, the answers to your ROBS questions might be di"erent. This is why we
recommend getting a one-on-one consultation with an experienced ROBS provider
who can answer all of your questions related to your personal ROBS opportunities for
free.
How to Set Up a ROBS in 5 Steps

Setting up a ROBS requires you to create a C corporation (C-corp) and then establish a
retirement plan, like a 401(k), for that new C-corp. Then, you roll over funds from your
existing personal 401(k) or IRA into the new company’s retirement plan. Using the funds
you’ve just rolled over, the new 401(k) plan purchases stock in the C-corp, at which
point the ROBS 401(k) rollover is completed and your startup is capitalized.
Completing this process on your own would be complicated and hiring accountants and
attorneys to assist you can be expensive and time-consuming. Setup doesn’t just
require you to file some paperwork. There are guidelines for how the account needs to
be managed. Working with one of the experienced ROBS providers gives you the
confidence to focus on your business while they handle the rest.
The five steps involved in setting up a ROBS correctly are:
1. Form a C-corp
The first step when using a ROBS to fund your startup is creating a C-corp. Your
business must be a C-corp to qualify for a ROBS because the IRS prohibits certain
transactions involving qualifying employer securities that only a C-corp can complete.
This means that a C-corp is the only business structure that can sell shares of the
business to a retirement account legally.
This also means that a ROBS won’t work for many common legal entities like a limited
liability company (LLC), a sole proprietorship, limited liability partnership, or an S
corporation (S-corp). If your business is already operating as legal business entity other
than a C-corp, you can convert your business entity to a C-corp to enable you to utilize
a rollover for business startups.
2. Create a Retirement Plan for Your New C-corp

The second step in setting up a ROBS is establishing a retirement plan like a 401(k) for
your new business. You have some retirement plan options, depending on how many
employees you expect to qualify for the 401(k), how many highly-compensated
employees are expected, and other business-specific factors. All of these factors would
be discussed during a free consultation with a ROBS provider.
Some of the most popular retirement plans small businesses use to set up a ROBS
include:
401(k) plan
Profit sharing plan
Defined benefits plan
Defined contribution plan
A combination of plans like a 401(k) with a profit-sharing component
You’ll need to find a custodian to manage the actual investments of the retirement plan
like Wells Fargo, Merrill Lynch, or Charles Schwab. Most ROBS providers don’t o"er those
services but will help you find a custodian to work with, and that custodian can help
you identify the right retirement plan for you.
3. Transfer Funds From Your Personal Retirement

Account to the New Company Retirement Plan
The third step is what makes the ROBS transaction a rollover. Once the company
retirement plan is set up within your new C-corp, your existing personal retirement
funds are transferred to the new retirement plan. Typically, this transfer is seamless,
but the time it takes depends on the process of the custodian currently holding your
funds.
4. Retirement Plan Purchases Stock in the

Corporation
The fourth step of a ROBS IRA or 401(k) transaction is to use the funds in your new
retirement plan to purchase stock in your new C-corp. To do this, the business has to
issue ownership shares of the corporation.
In general, the number of shares that are assigned to the retirement plan equals the
percentage of funding the plan is providing for the business. The percentage of startup
financing the retirement plan is providing won’t always equal 100%. That’s because a
ROBS can be used in conjunction with another financing method like Small Business
Administration (SBA) loans, personal savings, or additional partners and outside
investors.
You might not want to issue 100% of your business’s shares during this round of
funding. It may be advisable to issue only a fraction of the shares in case you want to
raise money by issuing additional shares at a later date. This can get a little
complicated, but a good ROBS provider will be able to walk you through it.
5. Funds Become Available to the Corporation

The fifth step in setting up your ROBS is fun because you can now put the proceeds
from your ROBS to use. The funds are now available to start, buy, or grow your business.
You can use these funds for any normal business activity but not for personal expenses
that you alone benefit from.
Keep in mind that there are ongoing administrative duties after your account is set up.
This includes a number of reporting requirements outlined by the IRS and United States
Department of Labor (DOL). A ROBS provider will handle these reporting responsibilities
for you.
If the five steps involved in setting up a ROBS sound complicated, it’s because they are.
That’s why so many small businesses have entrusted the ROBS transaction to a ROBS
provider that has had lots of experience with all the ins and outs of setting up a ROBS. If
you have $50,000 or more in your retirement account, click below to get a free, no-
obligation ROBS consultation with one of the top ROBS providers in the industry.
The 4 Requirements for a ROBS

A ROBS is not a loan, so you don’t have to meet traditional underwriting criteria like a
credit check or cash flow analysis to qualify. This doesn’t mean that there aren’t
requirements, however. Qualifying for a ROBS requires you to have enough funds in
your retirement account to make the transaction worth it, and you’ll need to be
compliant with certain government 401(k) rollover rules.
1. Hold an Eligible Retirement Account That Is

Current
To use a ROBS, your funds must currently be held in a qualified, tax-deferred retirement
account. Unfortunately, this means that funds held in popular Roth accounts, including
Roth IRAs and Roth 401(k)s are not eligible for ROBS.
Some of the most popular tax-deferred accounts eligible for a ROBS transaction
include:
401(k)
403(b)
Simplified IRA (SEP IRA)
Thrift savings plan (TSP)
Keogh plan
Traditional IRA
2. Have $50,000 or More in Retirement Funds

Using retirement funds to start a business usually requires that you have at least
$50,000 available in retirement savings. While this is not a strict rule, anything less
than $50,000 usually means that the ROBS costs are likely to be prohibitive. Most ROBS
providers won’t be willing to work with you if you’re trying to roll over less than $50,000
for this reason.
If you don’t have $50,000 or more in retirement funds, you can still complete a rollover
to fund your new business. However, you’ll likely have to do it on your own, which
makes it much riskier than using an experienced provider.
3. Have a Retirement Account From a Prior

Employer
The retirement account you’re rolling funds over from can’t be administered by your
current employer. Most employers will prohibit you from rolling over a retirement
account while you still work for them.
However, you can use a retirement account from a previous employer, no matter who
the current custodian is. You can also use funds in a self-directed IRA, a 401(k) you’ve
opened up on your own, or any other eligible account you have that you opened up
outside of your employer’s.
4. Be a Legitimate Employee of the New Business

To use a ROBS 401(k) you are required to be a legitimate employee of the business
you’re investing in. There is no minimum time you must work in your new business each
year. However, a thousand or more hours per year is usually a good rule of thumb. This
means that a rollover for business startups may not be a good option for absentee
owners or passive income businesses like real estate investing.
While you’re required to be a legitimate employee of the new business to use a ROBS
401(k), you may also be restricted in how much you can pay yourself in salary or
benefits. While there are no published limits on how much you can pay yourself if you
use a ROBS, taking too much money from your new business may qualify as a ROBS-
prohibited transaction.
Those are the only four technical requirements, but there are other things that could
impact your success with a rollover for business startups. Typically, these things
depend on what you’re using your funds for, what type of retirement account you have
and what your business situation is. This is why it’s so important to have a consultation
with a ROBS provider before deciding whether it’s the right decision for you.
Using a ROBS to Recapitalize a Business

One example of a situation where your ROBS may vary is if you’re using the money to
recapitalize your business. If this is your situation, then you should keep a few things in
mind before you start the process.
“If you’re planning to use a ROBS to

recapitalize an existing business, the business
should be generating some revenues already.
While the business doesn’t have to be
profitable, there needs to be a plan for
profitability once you get access to the rolled-
over funds.”
— Katie Burckhardt, Senior Vice President of Sales, Guidant Financial
These are not requirements in the way that a loan has minimum requirements.
However, a ROBS provider might not be willing to work with you if you’re trying to put a
bandage on a business that is losing a lot of money. One tip for using retirement funds
to start a business is to invest your retirement funds into a business that can develop
and grow because of your injection of capital.
ROBS Costs
A ROBS is a not a startup loan, so you don’t have debt or interest to pay back. Instead,
you’ll only be charged by the professionals you hire to set up and manage your ROBS.
While you could do this on your own with CPAs and attorneys, an experienced ROBS
provider is typically a better solution.
Top providers, like Guidant Financial, typically charge you two fees — a setup fee and an
ongoing monitoring fee.
1. ROBS Setup Fee

A ROBS provider charges approximately $5,000 upfront for a rollover business startup
transaction, and the fee must be paid out of your own pocket. The funds being rolled
over can’t be used to pay the setup fee.
The setup fee pays for setting up your account through a provider like Guidant
Financial. This includes setting up the C-corp, conducting a valuation of the business,
creating the company retirement plan, and filing paperwork with the IRS.
2. Ongoing Monitoring Fee

Your ROBS provider will help you administer your ROBS for a fee of $120 to $140 per
month. Plus, you may be charged a per-employee fee if you have more than 10
retirement plan-eligible employees. Some providers may charge you an annual fee
instead of a monthly fee, but the total yearly cost is the same either way and, generally,
they’ll allow you to make payments on that fee on a monthly basis.
The monitoring fee typically covers providing employees notifications when they
become eligible for the plan, adding and subtracting employees from the plan, annually
submitting required IRS filings like the Form 5500, and keeping track of any owner’s
obligations for the plan. This ensures that your ROBS transaction is following all the
401(k) rollover rules.
Because of these fees, it generally doesn’t make financial sense to do a ROBS if you’re
rolling over less than $50,000. Anything below $50,000, and you’re looking at setup
costs that run more than 10% of your funding. Considering that most startup loans
have origination fees of less than 4%, this level of expense is generally deemed too
costly.
It’s possible to avoid some of these fees if you complete a ROBS transaction on your
own without the help of a ROBS provider. However, we don’t recommend this because
it’s easy to run into legal troubles and tax violations when administering your account
unless you’re experienced and understand 401(k) rollover rules.
What’s more, you would likely need to hire individual attorneys and certified public
accountants to work on your behalf anyway. Few professionals have the experience
necessary to protect you completely from the potential tax and legal liabilities a ROBS
could bring if done incorrectly. It also isn’t likely to save you much money, if any at all,
by using these professionals instead of partnering with an experienced ROBS provider.
ROBS Prohibited Transactions

Business owners who decide to use a ROBS to start, purchase, or recapitalize a
business need to be careful to avoid ROBS prohibited transactions. Some prohibited
transactions in a ROBS 401(k) include excessive ownership compensation and the use
of business property for personal benefit. Prohibited transactions can expose you to
unanticipated taxes and penalties.
Personal Use of Business Property

If you use a ROBS 401(k) rollover, you aren’t allowed to use any property of the business
personally. Internal Revenue Code section 4975 places a 15% 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

If you use a ROBS for 401(k) business funding, you owe a fiduciary duty to your
retirement account that owns stock in the company. This means that your
compensation and benefits can’t be excessive, nor can you dilute your retirement
account ownership by giving yourself stock options.
When you set up a rollover for business startups, you aren’t allowed to pay yourself
from retirement funds that are transferred in to fund your business. Instead, you need
to pay yourself from operating revenue. If you have employees in the business that you
fund with a ROBS 401(k), and you qualify as a highly compensated employee under
Internal Revenue Code Section 414, you may also be in violation of 401(k)
nondiscrimination testing.
Promoter Fees
When you raise money for a new company using a rollover for business startups, it’s not
unusual to pay fees to advisors or brokers who help you raise money. However,
according to Internal Revenue Code Section 4975, these promoters may qualify as
fiduciaries, which would not be allowed to collect “promoter fees.”
According to Holly Bejar, vice president of operations and plan administration at

FranFund:
“The IRS says that a prohibited transaction is

a transaction between a plan and a
disqualified person that is prohibited by law.
This sounds simple, but the IRS also allows for
numerous exemptions to the prohibited
transactions, and this is where it becomes
confusing. The purpose is to have guidelines
to limit conflicts of interest between a plan and parties of interest,
including plan fiduciaries. We frequently receive questions about ERISA
section 406(b) that prohibits transactions that involve any type of self-
dealing by the plan fiduciary.
“Educating the employer about the potential conflict of interest that may
arise when they act as the fiduciary and as an o!cer of the company is a
prudent way to combat a potential prohibited transaction. It is common in
ROBS transactions for plan fiduciaries to also play a role in the company.
We must educate our clients that when acting as a fiduciary, they are
legally required to act in the best interest of the plan, regardless if that
action conflicts with personal or business priorities. These types of
situations are fairly infrequent, but educating the plan fiduciary is key.”
ROBS Compliance
In addition to ROBS prohibited transactions, there are additional 401(k) rollover rules
and compliance issues that business owners should be aware of. These include which
employees you o"er retirement plans to and what investments are o"ered in the plan.
While it’s rare, the IRS and DOL may audit your business to ensure compliance with all
ROBS 401(k) rules.
The ROBS providers we’ve reviewed report the rate of audit at less than 1%, and none of
our recommended ROBS providers have ever had a plan disqualified during an audit.
These professionals give you the support you need to prevent an audit and to help you
through one if needed.
ROBS Requirements If You Have Employees

A ROBS is designed to benefit the employees of the C-corp in which the funds are
invested. This means that while business owners who invest their retirement account
in their new company may benefit from operations, they are required to run the
company for the benefit of the retirement plan that owns the business.
If you have employees, there are two strict ROBS requirements that you must follow.
1. Eligible Employees Must Be Offered the Opportunity to Invest

in the Company Retirement Plan
When using a rollover for business startups (ROBS), you’re required to educate eligible
employees about your retirement plan, provide them with plan documents, and make
sure they have su!cient time to enroll. Employee eligibility requirements vary by state
and plan design but, generally, employees must be at least 21 years old, have worked
for your business for one year and have worked at least 1,000 hours during that time.
Once the employee decides to invest in the retirement plan, you must process
contributions and take care of any employer tax obligations related to the plan. Keep in
mind that employees can become eligible to participate in retirement plans at di"erent
times throughout the year.
Working with a ROBS company eliminates many of these headaches because it handles
most of these things for you. A ROBS provider keeps track of who is eligible and
provides onboarding documents to give to employees to ensure you are following

401(k) rollover rules—the only thing it won’t do is to deliver the information to your
employees.
2. Employees are Entitled to Invest the Same Way You Are
All employees that are eligible for the company’s retirement plan must have the ability
to invest in the same o"erings as everyone else. This means that you can’t o"er some
investments to owners but not to employees. If you make shares of the company part
of the retirement plan o"erings, then eligible employees get to buy in as well.
Keep in mind, however, that investment options within a retirement plan can change.
While your plan may o"er the option of investing in your new C-corp for a period, it may
change later on. If your retirement plan changes its investment options before
employees become eligible, then the newly eligible employees are not entitled to invest
in past o"erings. This can stop your employees from owning part of the company if you
desire.
You must meet the “e"ective availability” requirements when educating your
employees about the retirement plan. Essentially, this means you must make
investment vehicles available for a significant amount of time for the employee to make
an informed decision on whether to invest or not.
Abiding by the rules for eligible employees can be di!cult without the right guidance.
This is another reason we recommend partnering with a top ROBS provider that is
experienced at both setting up a ROBS and getting its clients successfully through
audits.
Government Audits of ROBS
Rollovers for business startups (ROBS) are held to certain compliance standards by
both the IRS and DOL. While either of these government agencies can initiate an audit
of the business to determine if the business’ retirement plan has violated any rules, the
chance of an audit is extremely low. In fact, our recommended ROBS provider, Guidant
Financial, reported that less than 0.35% of its clients were audited in 2018.
If you do face an audit, some things checked for compliance include:
The retirement plan was set up correctly: The provider wants to make sure that
all the requirements we discussed above have been met
All required annual filings have been completed: The provider will double check
that forms such as the annual IRS Form 5500 have been filed properly for each
year the ROBS has been in place
You meet all employee requirements: The business is required to educate
employees about the plan, provide all necessary forms and take care of all
employer taxes related to the retirement plan; we cover this in greater detail below
If you use a ROBS 401(k) rollover and do encounter an audit from the IRS or DOL, your
ROBS provider will help you through the audit process. This is one of the many benefits
of working directly with a ROBS provider to set up your plan. Our recommended ROBS
provider, Guidant Financial, has never had a plan disqualified during an audit.
Pros & Cons of Using a ROBS

A top concern that many entrepreneurs have when using retirement funds to start a
business is that if their startup isn’t successful, they could lose their investment. What
many people don’t realize is that the financial risk involved with a startup and the
possibility of business failure aren’t unique to a ROBS.
No matter how you fund a small business, there’s something on the line. If you go with a
ROBS, there certainly is a chance that the business could fail, and you could lose your
nest egg. However, if you go with another option and take out a business loan, for
example, you’ll likely have to sign a personal guarantee and put up collateral. If the
business fails while there is an outstanding loan balance, you could lose your home or
other personal assets.
The risk of entrepreneurship exists no matter how you finance your business so, as with
other types of business financing, we recommend balancing the pros and cons of a
ROBS before deciding whether it’s the right choice for you.
Pros of a ROBS 401(k)

Using a ROBS to fund a company has some great benefits. You’re able to access
retirement funds without paying income taxes or early withdrawal penalties and fund
your business without debt or interest payments. Without a debt burden, your business
success rate is also higher and, as your business grows, so does your retirement
account.
1. No Interest or Debt Payments
It can be di!cult and expensive to obtain capital to start or purchase a business. Many
small business lenders charge interest rates that are more than 55% per year. This is
especially true for startups. A rollover for business startups is not a loan, so you do not
incur debt and do not have to pay interest. That means the business is more cash-rich,
and more gross income can be reinvested back into the business.
2. Better Business Success Rates
Guidant Financial commissioned a study showing that companies funded by ROBS have
a much better survival rate than other startups. This is partly because they are not
starving the business for funds to make debt payments. About 81% of Guidant Financial
clients are still operating after four years or have successfully sold their businesses
whereas the standard is around 39%.
3. No Income Taxes or Early Withdrawal Penalties
If you were to take a withdrawal for using retirement funds to start a business, you
would have to pay income taxes and, if you’re age 59 1/2 or younger, early withdrawal
penalties. The penalty is typically 10% of the amount withdrawn. By structuring your
funding as a rollover, you avoid these costs.
4. No Impact on Personal Credit or Personal Assets
When you do a ROBS, there’s no credit check, and you don’t have to sign a personal
guarantee. Most loans require both, which means the personal credit of the business
owner can be damaged and personal assets taken if the business can’t a"ord to pay
back the loan. In contrast, with a ROBS, the failure of the business means only that the
funds you invested are lost.
5. Retirement Funds Can Grow in a Tax-advantaged Account
A loan is one-sided with money flowing from your business to the lender to pay back
the loan. When doing a ROBS, a 401(k) plan is created for the company. You can
contribute to that account as your business produces revenue and use the funds for
retirement.
Cons of a ROBS 401(k)

When funding a business with a ROBS, there are also some potential drawbacks. You
are risking your retirement funds on your business, and not every business is
successful. You also have to operate as a C-corp, follow detailed procedures when
managing your account, and there is a small risk of being audited by the IRS.
1. The Possibility of Losing Retirement Money
Most new businesses fail and, if yours does, then you could lose all the money you
invested. Also, consider the opportunity costs: If your retirement money was not
invested in your company, it could be invested in stocks, bonds, exchange-traded
funds (ETFs), or mutual funds. Assuming a reasonable rate of return, the money
invested in the business could have earned much more had it been placed in more
traditional investments.
2. You Could Be Audited
A rollover for business startups increases the likelihood that the IRS or DOL will audit
your business. If they find that you violated certain rules, you may have to pay penalties
and taxes. Fortunately, the increased risk is small.
With Guidant Financial, for example, fewer than 0.35% of plans face an audit. Also, most
ROBS providers will help you if you’re audited and back up their work by paying for your
audit costs. Guidant even provides outside counsel to represent your best interests at
no additional cost to you.
3. You Need to Administer a Retirement Plan
When you commit to a ROBS transaction, you become the administrator of a company-
provided retirement plan. Although some providers o"er guidance with this, you need
to market the plan toward employees and help them enroll. This can take time away
from your business.
4. Your Business Must Operate as a C-corp
It’s only possible to do a ROBS if your company is structured as a C-corp. Many small
businesses prefer the simplicity and tax advantages of an LLC or partnership instead of
a corporation. You’re giving that up if you decide to do a ROBS, but you can get help to
make sure everything is set up correctly.
To take advantage of the benefits while managing the risks of using a ROBS, we think
it’s important to use the guidance of a professional ROBS provider. One reason we
recommend Guidant Financial as the best ROBS provider for small business owners is
that it gives access to independent counsel before, during, and after the ROBS setup
process. It also o"ers a free one-on-one consultation upfront to answer your
questions.
Visit Guidant Financial
Unwinding a ROBS
Most entrepreneurs have the goal of starting a business, growing it, and someday
selling or exiting the business. Starting a business with a ROBS adds several steps for
unwinding a ROBS in addition to the business. How you unwind your ROBS 401(k) will
depend on how you’re exiting your business—selling stock or assets or going bankrupt.
There are several real scenarios to consider when unwinding a ROBS.
Business Stock Sale

If you sell the stock of your business, then unwinding a ROBS is very easy. Everyone
who owns a percentage of stock in the business typically receives that portion of the
sales proceeds, minus any funds required to wind down your investment or other
potential business obligations. The funds given to the retirement plan for its owned
stock in the business are rolled into an IRA for your benefit.
Business Asset Sale

Many businesses sell their assets instead of their stock to prevent the new owners from
taking responsibility for any potential future liabilities that the current company may
have. In these circumstances, unwinding a ROBS becomes more di!cult.
Once the business assets are sold, the funds are used first to pay o" liabilities and
administrative obligations. The net proceeds remaining after those payments are then
distributed to the owners of the business, including your retirement plan.
If Your Business Fails

If your business fails, then unwinding a ROBS still requires closing out your retirement
plan. You’ll need to educate your employees on what options they have for the funds
they’ve already invested in the plan. When your business fails, you do not have any
obligation to pay back your original funding to anyone, but you will lose the money.
Every Scenario Requires a Form 5500

Every 401(k) plan is required to file an IRS Form 5500 annually to report plan assets,
expenses, inflows, and outflows. If you use a ROBS 401(k), it’s important to file Form
5500 every year that your plan is active. Even when you complete unwinding a ROBS
transaction, you need to file a final Form 5500 for the year your plan was terminated to
stay in compliance with 401(k) rollover rules.
ROBS vs Business Loan for Startup Funding

The most common way to fund a business is to get a business loan, which can strain
the company’s cash flow early on for some businesses. While both ROBS and business
loans each have benefits, a ROBS isn’t a loan, so you don’t have to worry about monthly
payments or how you’ll pay it back.
While SBA loans for startups can be a great part of an overall financing strategy, a ROBS
transaction has di"erent costs, levels of flexibility, and accessibility for business
owners when compared to a business loan. It’s important to consider these factors
when deciding what works for you.
When deciding between a ROBS and a business loan, there are four things to consider.
1. Ease of Use
Depending on the size and type of loan, a business loan can be much easier if you want
to avoid the steps required in a ROBS transaction. Using an SBA loan instead of a ROBS,
you don’t necessarily have to use a C-corp. Instead, you could use an LLC or other legal
entity that may be easier. You also don’t need to set up a 401(k) plan right away if you
use a business loan.
If you decide to use a rollover for business startups, you’ll have to set up a C-corp,
which can be more involved than an LLC or other entity. You’ll also need to set up a
401(k) to hold retirement assets. However, if you do use a ROBS, you won’t have to pay
any of the loan rates associated with SBA startup loans or other types of business
loans. However, a ROBS is a great option if you don’t want to pay interest on a business
loan.
2. Cost
One of the biggest di"erences between a rollover for business startups and business
loans are the costs. To use a ROBS, you’re required to pay C-corp filing fees, along with
a 401(k), which has administration fees and potentially transaction fees to transfer in
assets. However, a business loan usually has application fees and interest costs that
make them more expensive than a ROBS.
Some ROBS vs business loan costs include:
ROBS C-corp filing fee ($50 to $500): Setting up a ROBS requires using a C-corp;
filing fees that vary by state
ROBS setup fee ($4,000 to $5,000): ROBS providers typically charge fees to help
set up your plan
ROBS maintenance fees ($100 to $200 per month): ROBS providers charge a
monthly fee to administer a plan that varies based on the number of participants
Business loan application fee ($0 to $400): Many lenders charge a small fee to
apply for a loan
Business loan closing fee (0.1% to 0.35% of loan value): If you’re approved for a
loan, most lenders charge an additional fee at closing that’s based on the amount
you borrow
Business loan interest expense (5% to 50%): Business loans charge an annual
interest rate that varies based on the lender and type of loan
3. Flexibility
A business loan and a ROBS 401(k) both o"er flexibility in di"erent areas. While ROBS
prohibited transactions restrict how and how much you can pay yourself from your
business, a ROBS also gives you flexibility in when and how you use the money for the
business. A business loan, on the other hand, may have a set payment schedule or limit
the potential uses of your loan funds. Loans will also typically restrict how much you
can pay yourself, especially a traditional bank loan.
4. Accessibility
401(k) business funding through a ROBS is typically far more accessible for small
business owners. This is because anyone who has assets in a retirement account can
use a ROBS while business loans are only available to those with good credit,
established earnings, and adequate time in business.
While there are a number of factors to consider when deciding between a ROBS and
business loan, it’s also important to understand they’re often used together. ROBS are
often used to supplement SBA loan funding or to meet down payment or equity
injection requirements for an SBA loan. In addition to providing ROBS, many ROBS
providers can help clients package SBA loan applications.
ROBS Frequently Asked Questions (FAQs)

We’ve put together a collection of frequently asked questions about ROBS from our
readers, past ROBS users, and viewers of our ROBS webinar. If we don’t answer your
question in this guide or the FAQs below, you can ask us a question in our Fit Small
Business forum or sign up to participate in our free ROBS webinar to learn more.
What can a ROBS be used for?

A ROBS can be used to start a new business or franchise, buy an existing business, or
recapitalize a business. However, most ROBS transactions are done to fund new
businesses. You can choose to use the funds in your retirement directly or apply them
as a down payment on a larger loan like an SBA loan.
According to Guidant Financial, here’s the approximate breakdown of how ROBS funds
are used:
Start a new business: 65%

Buy an existing business: 20%
Recapitalize an existing business: 15%
Does the company have to be a C-corp or can it be

an LLC, partnership, or S-corp?
The only business structure you can use for a ROBS is a C-corp. As long as you have
money invested in a company via a ROBS, you must remain a C-corp. However, if you
divest the money and unwind your ROBS, you can use any business entity you’d like
based on federal and state laws.
Can I change the business to an LLC later or does it

have to stay a C-corp?
As long as you have funds invested in the business, the entity must be a C-corp. This is
due to your company retirement plan owning shares of your business. Only a C-corp
allows something other than a person or legal business entity to own shares.
As the business owner, do I have to offer the

company retirement plan to all employees?
You must o"er the retirement plan to all eligible employees. The DOL does set minimum
requirements on who is entitled to a company retirement plan. Generally speaking, an
employee must be at least 21 years old, have worked for one year, and have worked at
least 1,000 hours during that time.
Do employees have to be provided the opportunity

to purchase stock in the company?
Not unless you or other owners have that opportunity. The requirement is that company
stock has to be made “e"ectively available” to employees the same way it’s available to
owners. While this will be in your initial part of your retirement plan, it can be removed
before you have employees become eligible, if you desire.
However, company stock can only be purchased by the employees through the
retirement plan. Since stock in new companies is usually illiquid―can’t be sold
easily―most employees tend to avoid investing even when it is o"ered.
What happens if the business fails?

When a business fails, the assets are liquidated and used to buy back as many shares of
stock owned by the 401(k) plan as possible. Any funds remaining in the 401(k) plan are
placed into an IRA for the business owner’s benefit, and both the plan and the
corporation are dissolved.
Can you pull more money out of your retirement

account using another ROBS down the road?
As long as you have $50,000 or more in another eligible retirement account, you can do
another ROBS transaction. It would be a separate transaction and depends on your
personal situation. That’s why we recommend having a free one-on-one consultation
with an experienced ROBS provider so that you can get your specific questions
answered.
Who is actually holding the retirement accounts?

The actual cash accounts are held by a custodian that’s typically a brokerage firm like
Fidelity or TD Ameritrade. In general, the cost of having a custodian hold the retirement
accounts is negligible or free. The brokerage firms make their money through their
normal charges for buying or selling stocks, mutual funds, and ETFs.
Can a ROBS be used to purchase real estate?

A ROBS can’t be used to purchase real estate directly but can be used to provide
working capital for a C-corp that invests in real estate. A ROBS can be used to fund
businesses that buy raw land, income-producing property, or developable land. Some
profits can be distributed to ROBS in the form of dividends.
How many people can invest in a business using a

ROBS?
There is no maximum number of people that can invest in a business via ROBS. It’s
common for multiple business partners to invest using a ROBS. However, anyone using
a ROBS to invest must be a legitimate employee of the business. You can also take
funding from investors as direct investments outside of this transaction.
Can two people combine their own ROBS to buy a

business?
Two people can combine their ROBS to buy a business. However, to keep money
separate, you may want one individual to invest in a 401(k) plan and another in a profit-
sharing plan. The best solution depends on your individual goals and situation. Most
ROBS providers o"er one-on-one consultations to answer this kind of question.
Does the business owner’s retirement account sell

shares or get paid dividends?
Although it is not commonly done, should the corporation issue a dividend to
shareholders, the 401(k) plan gets its proportionate share since it is a shareholder of
company stock. A more common practice is for the business owners to pay themselves
bonuses and higher salaries as the company starts generating excess cash flow.
As for selling shares, if the company is sold, the retirement account or accounts holding
shares will get payment in exchange for the shares it held. Also, the corporation can
o"er to buy back or “redeem” the shares from the plan, which provides another way to
increase the cash in a retirement account.
Can I use additional financing with a ROBS?

Many forms of financing, such as equipment financing, can be used with a ROBS to give
the business more capital to work with. The most popular option is getting an SBA loan
to handle any additional capital requirements your business may need.
A ROBS can also be used as a down payment for other financing. In fact, most of the
top ROBS providers will help you obtain additional startup financing if you need it.
However, many companies charge for this service.
How is a ROBS different from an ESOP?

A ROBS is used by incorporating a new company and forming a 401(k) under that new
company. An employee stock ownership plan (ESOP), on the other hand, is structured
to facilitate the purchase over time of a company’s stock by its employees.
In a ROBS owners transfer in retirement assets from other accounts and use that
money to fund their new business. However, In an ESOP, funds are used to cash out the
original company owners rather than to fund a new business.
Can I start a business with my 401(k)?
There are three primary ways to start a business using your 401(k). You can utilize a
rollover for business startups (ROBS), borrow against your retirement savings, or cash
out your 401(k). Each of these options has specific requirements pertaining to when
and how you can use the funds for your business.
Can I take money out of my IRA to start a business?

There are many rules surrounding IRAs and when funds can be withdrawn and for what
purposes. Withdrawing IRA funds to start a business may involve penalties and require
you to pay taxes on the withdrawn funds. However, if you have a self-directed IRA, you
can choose your own investments, allowing more latitude in this regard.
Can a ROBS be used to finance a franchise?

A ROBS is a popular way to start or buy a franchise. In fact, more than 60% of new ROBS
clients helped by the best ROBS providers we reviewed were franchisees. Just like any
other type of startup financing, a ROBS has pros and cons that should be considered
before deciding if it’s right for you.
Bottom Line
A ROBS can be a great option for funding a small business, whether you’re just starting
out, want to buy a business, or recapitalize your current business. Ultimately, you
should weigh all the pros and cons of a ROBS and get all your questions answered by a
professional before deciding if it’s right for you.
While doing your research and preparing for a ROBS is important, it is impossible to
replicate the experience of doing thousands of ROBS transactions. If you have $50,000
or more in your retirement account, you qualify for a free, no obligation one-on-one
consultation with a ROBS expert to help you understand your options.

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Rollover for Business Startups (ROBS): The Ultimate Guide 12/5/19, 2(45 AM

Rollover for Business Startups (ROBS):

Get Your Free Consultation

How a ROBS Works

business retirement account owns shares of your new business.

A ROBS is a very specialized financing tool that is dependent on your personal

Get Your Free Consultation

How to Set Up a ROBS in 5 Steps

The five steps involved in setting up a ROBS correctly are:

2. Create a Retirement Plan for Your New C-corp

you identify the right retirement plan for you.

3. Transfer Funds From Your Personal Retirement

4. Retirement Plan Purchases Stock in the

5. Funds Become Available to the Corporation

Get Your Free Consultation

The 4 Requirements for a ROBS

1. Hold an Eligible Retirement Account That Is

2. Have $50,000 or More in Retirement Funds

3. Have a Retirement Account From a Prior

4. Be a Legitimate Employee of the New Business

Using a ROBS to Recapitalize a Business

“If you’re planning to use a ROBS to

— Katie Burckhardt, Senior Vice President of Sales, Guidant Financial

1. ROBS Setup Fee

2. Ongoing Monitoring Fee

ROBS Prohibited Transactions

Personal Use of Business Property

Inappropriate Owner Compensation

According to Holly Bejar, vice president of operations and plan administration at

“The IRS says that a prohibited transaction is

ROBS Requirements If You Have Employees

1. Eligible Employees Must Be Offered the Opportunity to Invest

provides onboarding documents to give to employees to ensure you are following

2. Employees are Entitled to Invest the Same Way You Are

Government Audits of ROBS

If you do face an audit, some things checked for compliance include:

Pros & Cons of Using a ROBS

Pros of a ROBS 401(k)

1. No Interest or Debt Payments

2. Better Business Success Rates

3. No Income Taxes or Early Withdrawal Penalties

4. No Impact on Personal Credit or Personal Assets

5. Retirement Funds Can Grow in a Tax-advantaged Account

Cons of a ROBS 401(k)

1. The Possibility of Losing Retirement Money

2. You Could Be Audited

3. You Need to Administer a Retirement Plan

4. Your Business Must Operate as a C-corp

Visit Guidant Financial

There are several real scenarios to consider when unwinding a ROBS.

Business Stock Sale

Business Asset Sale

If Your Business Fails

Every Scenario Requires a Form 5500

ROBS vs Business Loan for Startup Funding

Some ROBS vs business loan costs include:

ROBS Frequently Asked Questions (FAQs)

What can a ROBS be used for?

Start a new business: 65%

Does the company have to be a C-corp or can it be

Can I change the business to an LLC later or does it

As the business owner, do I have to offer the

Do employees have to be provided the opportunity