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Revealed: 8 Common Myths about Rollovers for Business Start-ups

May 15, 2014 by @guidant
8 Common Myths about ROBS

Using Rollovers for Business Start-ups (ROBS) to finance a business isn’t new, but it is unfamiliar to many. As a result, there are a lot of myths swirling around about the use of ROBS that may be stopping would-be entrepreneurs from chasing their dreams.

ROBS involve 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.

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 investment in small businesses – businesses that pay taxes.

2. ROBS are an investment, not a loan.

With ROBS, you’re investing in your new business or franchise, not taking on debt. This means you won’t have to make monthly loan payments or incur interest, and you have the opportunity increase the value of your 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 investments 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.

5. ROBS cannot fund an LLC.

To meet the compliance requirements of Rollovers for Business Start-ups, the business must be a C Corporation. A Limited Liability Company (LLC), Partnership or S Corporation don’t meet the necessary requirements.

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

Depending on the state in which you’re filing, and how fast you’re able to file the necessary paperwork, funding can take as little as a few weeks.  Most are completed in less than 30 days.

7. ROBS are not the same as Self-directed IRAs.

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 not only start-ups, but also purchases of existing businesses and franchises.

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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  • 11 thoughts on “Revealed: 8 Common Myths about Rollovers for Business Start-ups”

    1. Kara J Everitt says:

      I would like to hear more about ROBS. Please contact me via Phone. 570-663-2978

      1. Guidant Financial says:

        Hi Kara. Thanks for reaching out! I’ve asked a member of our team to reach out to you with more information about ROBS. You should be hearing from them soon. If you’d rather talk to someone sooner rather than later, you may also call us at 888.472.4455. Have a great weekend!

    2. Allison Johnson says:

      I am 57 . If I withdraw funds from IRA and rollover to ROBS would there still be the 10% penalty?

      1. Guidant Financial says:

        Hi Allison. Great question. Rolling over existing retirement funds into a ROBS account does NOT trigger the early-withdrawal penalty for those younger than 59 and 1/2. If fact, the rollover doesn’t trigger any tax penalties whatsoever, which is what makes this option appealing to so many. Let us know if you have any other questions!

    3. Brent says:

      If I use ROBS for part of the funding to purchase a business, but also need a loan, either an SBA loan or conventional business loan to do the deal, will the lender be able to use the assets of the business owned within the ROB as collateral for the loan? If my business were to fail and I had to file bankruptcy, would the collateral be protected against claims by the lender, because it is held within a retirement account?
      If that is the case, it seems like it would be very difficult to obtain an SBA or conventional business loan with a ROBS arrangement, since the lender would not have any security in the event of business failure and bankruptcy. Please advise, thanks.

      1. Guidant Financial says:

        Hi Brent, You can use ROBS in conjunction with an SBA loan to fund your business, but the ROBS transaction is not collateral. As a part fo the ROBS process, your 401(k) plan purchases stock in your new corporation. The funds from that purchase can be used as a down payment for an SBA loan as cash, not as collateral. If you have any questions or want to discuss your funding options further, please don’t hesitate to give us a call at 888-472-4455.

    4. Can I take my ROBS funds and move them to an LLC (separate entity) and operate from that second entity? Please respond to my email and not my website. Thank you. Teri

      1. Guidant Financial says:

        Hi Teri, companies that are funded with ROBS can form subsidiary LLCs, but they still need to operate under the parent C corporation. Someone from our team will be reaching out directly to you. Thanks for your question!

    5. Charlie Slack says:

      Hello, I get that I essentially act as an employee of the C corp and can draw a salary off of generated funds. Can I also take an end of year bonus as well? Thanks

      1. Guidant Financial says:

        Hi Charlie, great question. As long as the bonus is still considered reasonable compensation, and your company is in a position where it can afford the bonus, then yes! Your CPA can help determine reasonable compensation and what an appropriate bonus amount would be.

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