Youâre ready to start your own business, and you just need the financing to bring your ideas to life. However, in your journey to become a business owner, you may encounter challenges. Many new business owners find that securing a business loan is easier said than done. When it comes to requirements surrounding time in business, annual revenues, and personal and business credit history, you may find yourself falling a little short.
Whether you want to purchase a franchise, acquire a business, refinance your existing business, or start a new business, sometimes you have to get a little creative with your financing. One idea that probably hasnât crossed your mind is a Rollovers as Business Startups plan. If you have a retirement account, read on to learn how you can leverage this account to start or grow your business.
What Is A ROBS?
Rollovers for Business Startups — or ROBS — is a type of transaction you can use to fund your new or existing business if you can’t take out a loan or work with outside investors. This method of funding your business does not involve borrowing money. Instead, you are rolling over funds from your individual retirement account, 401(k), or another retirement account to use as financing for your business.
Since you arenât borrowing or cashing out your retirement account, ROBS allows you to invest your retirement funds without being penalized. A ROBS transaction is a financing choice for many entrepreneurs that don’t qualify for startup loans or traditional financing.
How A ROBS Plan Works, Step-By-Step
A ROBS plan is a complicated transaction, which is why most people that choose this funding avenue work with an attorney or a ROBS provider. However, even if you work with an expert, itâs important to understand how the process works.
Step 1: Establish A C-Corp
The first step of the rollover is to establish a new C corporation, an entity with shareholders that are taxed separately from the entity. A C corporation is the only business structure that will work with a ROBS.
Step 2: Set Up A New 401(k)
The next step is to set up a new retirement plan for the business. The business then becomes the sponsor of the 401(k) plan. In most cases, the entrepreneur will be the only employee of the new corporation and will be the only participant in the 401(k) plan, although you may wish to discuss other options with your ROBS provider or attorney.
Step 3: Roll Over Existing Retirement Accounts
Through a series of legal forms, funds from an existing retirement account are transferred to the newly-created 401(k) plan. Because these funds have been rolled over, the transaction is not a taxable distribution and will not incur penalties.
Step 4: Use Funds From 401(k) To Purchase Stock
Funds in the new 401(k) plan are then used to purchase stock in the C corporation. Now, the C corporation has cash from the sale of the stock.
Step 5: Build Your Business
With money in your pocket, you can use funds to acquire a business, fund your startup, or inject money into an existing business — all without tax liabilities or penalties.
Who Qualifies For A ROBS?
Anyone with an eligible retirement plan qualifies for a ROBS. The most common retirement plans used for this purpose include 401(k) plans, 403(b) plans, and defined contribution plans like Traditional IRAs, Simplified Employee Pension, and Thrift Savings Plans. You may also use a combination of qualifying plans.
The retirement plan you use to fund your business cannot be from your current employer. Most employers will not allow you to roll over your account while youâre still working for them. However, plans from prior employers, your own 401(k), or self-directed IRAs are eligible to roll over.
Earlier, we discussed the steps for setting up your ROBS. Those steps included setting up a new C-corp and becoming an employee. This isnât just something that you write on the forms and forget. You must be a legitimate employee for the business. While there are no hard rules as to how much time you devote to the business, you should expect to commit at least 1,000 hours per year. If this doesnât work for you, consider other financing options for your business.
You also must ensure that you meet all the requirements of your chosen ROBS provider. Some providers have requirements related to the minimum amount of money in your retirement fund, how youâre using the funds, and the type of requirement account you plan to roll over. Before selecting your ROBS provider, understand their requirements. Weâll offer up provider recommendations a little later in this article.
Pros & Cons Of Using A ROBS
A ROBS sounds like a great way to finance a business, doesnât it? Approached correctly, a ROBS can be a financially-savvy move. However, itâs also important to understand that there are drawbacks to using a ROBS. Before you dive in, weigh out the pros and cons to determine if this is the right financial solution for your situation.
- No Debt:Â You arenât borrowing against your retirement account or taking out a loan. With a ROBS, youâre leveraging your retirement account to receive the money you need for your business, so you wonât be indebted to a lender.
- No Interest:Â Because you arenât taking a loan from a lender, you wonât have to worry about paying interest for borrowed funds. This means that youâll have more money to invest in your business.
- Easy To Qualify:Â If you have a qualifying retirement account, you can get the financing you need with a ROBS. You wonât have to worry about your personal or business credit score, a lack of revenue, or any other factor considered by a lender. Because you are leveraging your own account and arenât taking out a loan, the requirements of traditional lenders do not apply.
- No Penalties:Â When you withdraw your retirement funds to finance your business, you may be subject to early withdrawal penalties and taxes. With a ROBS plan, you wonât have to pay these costs, leaving more money in your pocket.
- No Personal Guarantees Or Collateral:Â Remember, a ROBS is not a loan, so you wonât have to sign a personal guarantee or put up collateral to receive your funds. With a business loan, you may be required to do one or both, which means that if your business fails and you can not pay back your loan, you risk losing your personal assets. With a ROBS, the money invested from your retirement account is the only thing at risk.
- Risk Of Losing Your Investment:Â Although you wonât have to worry about losing your personal assets if your business fails, you do risk losing your money for retirement. Of course, there have been many entrepreneurs that have started successful businesses using a ROBS. However, you should know that there is always a risk involved. If your business fails, you lose your retirement money.
- Fees & Tax Liabilities:Â Unlike a business loan, you wonât have to pay interest to a lender with a ROBS plan. However, this doesnât mean that this strategy doesnât come at a price. Because you are creating a C-corp, your tax liabilities may be higher than other business structures. If your transaction is not set up properly, you may have to pay penalties to the IRS if youâre audited. This is why itâs so important to select a ROBS provider that understands the process and is able to help avoid missteps when setting up and maintaining your ROBS. Setting up and maintaining your ROBS also has associated costs. With most providers, youâll be required to pay a setup fee, as well as monthly maintenance and reporting fees.
The Best ROBS Providers
While it is possible to roll over your retirement funds to finance your business yourself, handling the paperwork and navigating the legal requirements can be confusing. Instead of tackling this difficult task on your own, leave it to the experts. If a ROBS sounds like the right next step for you, consider working with one of these two lenders: Guidant Financial and Benetrends.
In addition to financing options — including Small Business Administration loans and unsecured loans –, Guidant Financial offers ROBS to eligible applicants.
To qualify, you must have at least $50,000 in a rollable retirement or pension account. Eligible accounts include:
- Traditional IRA
- Thrift Savings Plan (TSP)
- Simplified Employee Pension (SEP)
With Guidant Financial, you can roll over up to 100% of your account balance to fund your business. Most applicants receive funding approximately 3 weeks after starting the application process.
To set up your ROBS, Guidant Financial charges a setup fee of $4,995. An additional $139 per month is charged as a Plan Administration fee.
Benetrends Financial offers a variety of business funding solutions, including Small Business Administration loans, equipment leases, securities-backed lines of credit, and startup loans. One of the companyâs most popular funding options is its Rainmaker Plan.
The Rainmaker Plan is a ROBS that was first launched by Benetrends in 1983. With this plan, you can roll over your 401(k) or IRA to receive funding for your business in as little as 10 days. Benetrends offers an in-house team of professionals that will offer guidance throughout the process. When you apply with Benetrends, youâll work with a Financial Funding Expert to design a custom plan to best fit your business needs.
Benetrends also offers Audit Shield protection, which protects your plan in the event of an IRS or Department of Labor inquiry or audit.
To get started, Benetrends charges an initial setup fee of $4,995, which includes setting up your plan and your C-corp. After paying your initial fee, a monthly service fee of $130 is charged for ongoing retirement plan services. Fees are all-inclusive and include services such as audit protection, legal support, and compliance at no additional cost.
A ROBS isnât the right financial solution for every aspiring entrepreneur. In some cases, you may want to explore other options, including SBA loans, traditional loans, and startup loans. However, if you have a qualifying retirement plan, youâve reviewed the benefits and drawbacks, and you donât want to go through the hassle of securing a traditional loan, this may be the right financing option to launch or recapitalize your business.
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