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What Are Rollovers for Business Startups (ROBS)?

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July 22, 2021

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Starting a business can be a costly affair, and one of the hurdles most prospective business owners face is securing adequate financing. The eligibility and cash requirements for getting a small business loan to start a business can be challenging for most borrowers to meet.

For this reason, many aspiring business owners are opting for other avenues of financing to make their aspirations and dreams come true. 

Rollover for business startups (ROBS) is one such example of an alternative financing method that's getting more and more popular.

Here, we try to help you understand everything about ROBS funding: what it is, its history and legality, how it works, pros and cons, and much more. 

What is a rollover for business startups (ROBS)?

A rollover for business startups is a way for current and prospective business owners to use their retirement funds to pay for business costs.

ROBS allows business owners to pay for all initial costs needed to start up their business, meaning that they don't necessarily need to look for funding in the form of a business loan.

Additionally, ROBS can be used to invest in or purchase an existing franchise or business. Oh, and did we mention? All these transactions are not only fast but are free of a tax penalty.

The history and legality of ROBS

ROBS was introduced way back in 1974 when congress passed the Employee Retirement Income Security Act (ERISA). This act gave employees responsibility for their retirement savings, initially under the control of employers.

Many aspiring business owners who aren't aware of ROBS, and even current entrepreneurs who may be familiar with it, may question the process of ROBS. That is to say, some have doubts as to the legality of its structure.

What triggers most of these questions is the concept that retirement funds should never leave one's retirement account. To clarify, the structure of ROBS works in the same way as traditional brokerage accounts and is thus 100% legal. 

How does ROBS work?

A ROBS plan is not that easy to acquire. It involves many complicated transactions, often calling for the assistance of a specific ROBS provider or attorney.

However, even with the assistance of an expert, it is essential for you as a business owner to understand how the process works. Below are steps that ROBS transactions follow:

Step 1: Establish a C corporation

The first step of a rollover involves establishing the new business as a C corporation, a type of business entity with shareholders or owners taxed separately from the entity. It is worth noting that it is also possible to convert an existing business into a C corporation. 

This first step is essential as a C Corporation is the only business structure that is compatible with a ROBS plan. 

Step 2: Set up a new 401(k) plan

In most cases, you as the entrepreneur are the sole employee of the new corporation, meaning that you’re the sole participant in the 401(k) plan. This being said, you may wish to discuss other options with your attorney or ROBS provider.

With a 401(k) plan in place, you as a business owner can purchase or invest in private stock.                                  

Step 3: Rollover

The next step is to roll over funds from your current retirement account into the new 401(k) plan.

Several legal requirements must be met in order to achieve this, but the good news is that this transaction is not taxable because it only involves the rolling over of the funds. No penalties are incurred in this step. 

Step 4: Purchase stock

Using funds from the new 401(k) plan, you can then purchase stock in the new C corporation. This enables the entity to build a cash base from stock sales.

Step 5: Build a debt-free business

Now that there's money in the pocket after the successful rollover, you as the business owner can now use the funds to acquire a new business, fund its startup, or invest the funds into an existing business.

All these transactions attract no tax penalties or liabilities. What's more, you are even permitted to use these funds as a down payment for an SBA loan. 

Pros and cons of using a ROBS

After reading this far, it may sound like a ROBS plan is a perfect way to finance your business. With the correct approach, a ROBS can definitely be a money-saving means of funding a business. 

Nevertheless, using a ROBS also comes with some disadvantages, and it is essential to consider these prior to making your decision. The pros and cons listed below may prove helpful as you seek to determine whether a ROBS plan is the right financial solution for you. 

Pros

  • There are no debt or interest payments.
  • Businesses financed with a ROBS have a higher chance of success.
  • There are no withdrawal penalties or income taxes.
  • It is easy to qualify, with no considerations such as credit scores or income sources.
  • It requires no collateral or personal guarantees.
  • It has a high potential of growing your retirement funds as the business grows and succeeds.

Cons

  • The risk of business failure is always there, and in this case, it means losing retirement funds.
  • The business must operate as a C corporation, which may not be the best fit for your business.
  • Most ROBS providers charge high fees for their services.
  • IRS queries and audits may be frequent.

Dos and don'ts of a ROBS

Every financial plan has its boundaries. The following points highlight actions that should and should not be done within a ROBS financing plan

Do:

  • Offer your qualified employees the opportunity to be part of the 401(k) plan.
  • Maintain an active operating business entity (this is mandatory).
  • Remain an active employee of your business, earning an appropriate salary.
  • Ensure the business remains a C-corporation as long as its funding is under ROBS.
  • Require everyone to follow all rules set out by the IRS, DOL, and your ROBS provider.
  • Abide by all federal laws in everyday business operations and activities.
  • Ensure to file your corporate business tax returns every year, including a form 5500.
  • Make the right investment decisions regarding your ROBS-funded business.
  • Pay the correct amount of money for your stock, in a manner that aligns with a Fair Market Value.
  • Follow due process if deciding to sell your business or terminate the program, including filing your corporate taxes and form 5500 and meeting all other annual legal requirements.

Don't:

  • Bar or obstruct your employees from being part of the 401(k) plan.
  • Turn the business model into a passive one.
  • Shift your role into one of a passive employee.
  • Change the C-corporation entity into another type of business entity.
  • Ignore any ROBS’ rules set by IRS, DOL, and ROBS providers, or do anything the wrong way. This may attract higher fees and penalties, affecting the stability of the whole structure.
  • Ignore federal law and instead use state laws to manage one's business operations.
  • Fail to file your corporate taxes and form 5500. These are annual requirements.
  • Make poor or overly risky business decisions - these may be costly in the long run.
  • Pay more for your C-corporation stock. The prices should be strictly the Fair Market Value.
  • Fail to follow the due process in closing the program or selling the business. 

The 5 best ROBS providers

Without a doubt, it is possible to roll over retirement funds into your retirement account by yourself. However, handling the accompanying legal requirements and paperwork can be a daunting task, and many may prefer to seek expert assistance. This is where ROBS providers come in handy.

It's important to note that ROBS providers charge a fee for their services and that fees may vary from one provider to another. These fees may include:

  • Setup fees
  • Ongoing fees

ROBS providers provide support ranging from audit support, IRS 5500 form filing, to plan qualification and notification, although exact services may vary from one ROBS provider to another.

If a ROBS financing plan feels ideal to you as a prospective business owner, a good next step would be to seek the services of one of these five best ROBS providers listed below:

FranFund - Best overall

FranFund’s customer reviews are witness to the company’s excellent service. 

FranFund offers aspiring entrepreneurs an affordable option to help their franchise get off the ground successfully.

Guidant Financial - Best for guaranteed audit support

Guidant Financial helps aspiring business owners secure funding to start, grow, or buy a business. They offer ROBS to eligible applicants with any of the following accounts:

  • 401(k)
  • 403(b)
  • Thrift Savings Plan (TSP)
  • Keogh
  • Traditional IRA
  • Simplified Employee Pension (SEP)

 To qualify, Guidant Financial requires you to have a minimum of $50,000 in a rollable retirement account, which they can roll over up to 100 % of the balance in your account. The process takes approximately three weeks.

For those looking for a ROBS provider who can offer free ongoing counsel during their audit, Guidant Financial may be a solid option. 

Benetrends - Most Established

Benetrends also offers a ROBS in the form of a “Rainmaker Plan”.

This plan, launched in 1983, allows you to roll over your IRA or 401(k) to receive funds for your business, and takes as little as ten days for the funds to be available for you for use.

One key benefit of working with Benetrends is the chance to work with a Financial Funding Expert to draft a plan that accommodates your specific business needs. In addition, you get an Audit Shield Protection, which protects your business plan in the case of an IRS audit.          

My Solo 401k - Most affordable setup fees

If you’re seeking to use a ROBS plan to fund your business without necessarily breaking the bank, My Solo 401k might be a good option for you.

Not only do My Solo 401k have the lowest initial setup fee, but they also monitor progress for a whole year completely free of charge.

Business Funding Trust - Best for businesses with no employees

For businesses with no employees, or if you as the business owner will be the sole employee, then Business Funding Trust (BFT) is a great option.

However, BFT may not be the best if your newly formed business has several employees, as despite having a decent ROBS offering, it lacks the ongoing service options that other ROBS providers provide.

Are ROBS right for you?

So, if you’re sitting on a great business idea and a qualifying retirement plan, and are tired of the hassles that come with securing a traditional loan, a ROBS plan might just be a dream come true. 

And, with the help of Hunt Club, building one's startup can never get easier.

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