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Using the Rollovers for Business Start-ups (ROBS) arrangement, also knows as 401(k) business financing, to fund a business has been an option since Congress passed the ERISA Act in 1974, so it certainly isn’t new. However, even with gaining popularity, many stock brokers and financial advisors aren’t aware of, or don’t educate their clients about this options because it doesn’t provide sufficient profit for their institutions. As a result, ROBS is unfamiliar to many, and there are a lot of myths swirling around that may be stopping would-be entrepreneurs from chasing their dreams.

ROBS involves using money from an eligible retirement account to finance the purchase of a business or franchise. To make a long story short, a corporation is formed, and that corporation then sponsors a 401(k) plan. Funds are rolled from an existing retirement account into the new 401(k) without triggering a taxable distribution. This new 401(k) purchases (or invests in) shares of the corporation, which can then purchase a business or franchise. It looks like this:

ROBS Formation

In essence, ROBS allow you to take control of your finances and invest in yourself. Here’s the truth behind the most common ROBS myths:

1. It’s not tax avoidance.

Using the ROBS structure isn’t a way to evade taxes by any means. The Employee Retirement Income Security Act of 1974 (ERISA) was set up explicitly to encourage employees to take control of the direction of their retirement funds.  Using ROBS, you can direct your retirement funds to purchase shares in a small business – a business that pays taxes.

2. ROBS is not a loan.

With ROBS, you’re redirecting your retirement funds into your new business or franchise (instead of the stock market), not taking on debt. This means you won’t have to make monthly loan payments or incur interest. Even better, a successful business will help you increase the value of your retirement investment.

3. You can use ROBS to diversify your nest egg.

You don’t have to take every penny from your existing retirement fund for ROBS to work. Many people only use a portion of their retirement assets, leaving the remainder in their existing 401(k) or IRA to be invested traditionally. What’s more, the ROBS arrangement can be used in conjunction with a small business loan or other financing option, so you can diversify your business funding even further.

4. ROBS are not for absentee business owners.

If you’re hoping to use ROBS, you must be a bona fide employee of your new business. As a guideline, Guidant recommends you work at least 1,000 hours per year to be considered a bona fide employee, which can include sweat equity. Being an active employee of the corporation is a benefit to you because you have the opportunity to earn a salary and make regular contributions to your new 401(k) plan.

5. ROBS must fund a C corporation.

To meet the compliance requirements of Rollovers for Business Start-ups, the business must be a C corporation. Many of our clients who are hoping to structure their company as a Limited Liability Company (LLC) or multiple LLCs, are able to achieve this by forming subsidiary LLCs. The C corporation remains the parent company and is the 100 percent owner of the LLC.

6. Getting funded using ROBS can take as little as three weeks.

Because there is no application process and minimal eligibility requirements, ROBS funding is very fast. The biggest factors that affect timeline are the state in which you’re filing, and how fast you’re able to file the necessary paperwork and how quickly your current custodian will release your retirement funds. Most ROBS funding transactions are completed in less than 30 days.

7. ROBS funding and Self-directed IRAs are not the same.

While it’s possible to finance a business with both self-directed IRAs (SDIRAs) and ROBS, there are some major differences between the two. If you use an SDIRA, the owner may not work for the business they invest in or take a salary. The investment amount is also potentially liable for the unrelated business income tax (UBIT), which can get very expensive. With ROBS, the 401(k) owner must work for the new business, and the UBIT doesn’t apply.

8. ROBS can be used to fund start-ups.

As the name suggest, Rollovers for Business Start-ups are a great option to finance start-ups. But there’s more than one way to become a small business owner — they’re also a great vehicle for purchasing an existing businesses or franchise.

To some, the ROBS process can appear to have complex rules and regulations. But if you have a qualified retirement plan with a balance that’s sufficient for your start-up needs and work with an experienced company to support its formation, it can be a great option to start or recapitalize your business debt-free. Ready to get started?


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