As an entrepreneur or business owner, you know that having financial options can make or break your success. But did you know many business owners are tapping into their 401(k) to get ahead?
401(k) financing, also known as Rollovers for Business Startups (ROBS), lets you invest in a business through your retirement plan — without incurring withdrawal fees.
With an unpredictable economy and rocketing interest rates, ROBS offers aspiring and current business owners a secure way to start their own businesses without piling up debt. By tapping into retirement funds, entrepreneurs can confidently invest in themselves for success — giving them complete control over achieving their dreams.
It’s no wonder that ROBS is gaining momentum with its unique benefits during an economic downturn. In our 2023 Small Business Trends, over half of the small business owners surveyed utilized ROBS to finance their businesses this year.
So, what is a ROBS — and how does it work? Is ROBS right for you? If you’re interested in learning the ins and outs of ROBS, our latest webinar is for you!
If you want to learn more about business financing methods, check out our Complete Guide to Small Business Funding Options.
Everything You Need to Know About ROBS Webinar
In this webinar, two experienced business financing experts — Ralph Nillssen and Keith Tracy — take us through everything you need to know about ROBS. Join Ralph and Keith as they dive into the history of ROBS, break down how to set up a ROBS, and more. Watch the webinar in full-screen.
About Our Hosts
Ralph Nilssen brings enthusiasm and knowledge to the world of business and financing that comes with his two decades of experience. He plays a critical role at Guidant as Director of Sales. Ralph’s experience building small businesses and working with business owners led to his passion for entrepreneurship.
Keith Tracy joined Guidant in 2003 — as the very first Guidant employee. He focuses on educating Guidant’s clientele on innovative, industry-leading financing solutions for business funding. Since joining Guidant, Keith has helped thousands of entrepreneurs create the businesses or franchises of their dreams.
ROBS Webinar Key Takeaways
Here are some of the top takeaways and highlights from our Everything You Need to Know About ROBS Webinar:
History of ROBS
- ROBS stands for “Rollovers for Business Startups,” — and it’s actually a structure that has been in place for over three decades. ROBS has been written into the Internal Revenue Code (IRS) since 1974. Technically, it’s called an Eligible Individual Account Plan (EIAP).
- But how did the name “ROBS” come to be? In 2007, more and more Americans struggled to support their families as layoffs swept the nation. In response, the IRS and the Department of Labor reviewed the rollover program — called the “ROBS Memorandum,” where the name “ROBS” was born Rollovers for Business Startups.
- ROBS allows aspiring and current business owners to take their retirement funds and diversify their investments into business ventures. In short, the ROBS program allows you to fund your business — while also investing in the stock of your own business.
- This financing strategy goes by many names, including 401(k) business financing. However, ROBS can be utilized with most retirement plans.
Get the rundown on all eligible retirement plans for 401(k) business financing in ROBS 401k Business Financing: 10 Types of Eligible Retirement Funds.
What is a ROBS?
- A ROBS is a way for entrepreneurs and small business owners to use their retirement savings to finance a new business or fund their existing business — without taking a loan or selling equity shares. This method allows you to keep control of your company while accessing funds that would otherwise be inaccessible until retirement age.
- At a high level, ROBS simply lets you shift the way you invest from the public market, where you can’t control private stock. With ROBS, you’re in complete control of the stock and business capital.
- The structure of a ROBS is very specific. For example, your business is to be registered as a C Corporation.
Just getting started with learning about ROBS? Here are the Top 10+ Resources and Guide for Rollovers for Business Startups.
How Does it Work?
- The ROBS process starts with setting up your C Corporation (C Corp). A C Corp is an independent legal entity from its owners and shareholders, meaning it pays taxes separately from them at corporate rates on all profits.
- C Corps are subject to double taxation. But “Double taxation” doesn’t mean you’ll be taxed twice. It’s called double taxation because the profits are taxed first at the corporate level and again by the recipient of dividends at the individual level.
- Once your C Corp has been established, you can then transfer funds from your qualified retirement account into the C Corp by using a Direct Rollover or Indirect Rollover. The funds will be used as startup capital for purchasing ownership interests in the corporation, which can then be used as collateral for additional loans or investments into the business.
- Your C Corp must also have an established qualified retirement plan to utilize ROBS. Generally, this is a 401(k). You can offer a 401(k) with — and without — profit sharing and matching.
- To use ROBS, you’re also required to be a certified employee of your C Corp. That means you’ll also have access to a 401(k) as an employee of your business.
- The IRS has additional specific regulations when using ROBS that must be followed, including limiting the amount of ownership equity that can be contributed, providing adequate consideration for any transferred assets, and protecting your fiduciary duty as it relates to your retirement money. When used properly, ROBS can be an effective tool for entrepreneurs who are looking to launch a business without investing significant sums of personal capital.
Want to learn more about 401(k) business financing and how it works? See our Complete Guide to 401(k) Financing: Rollovers for Business Startups.
What do ROBS providers offer?
- ROBS providers, like Guidant, are technically the plan administrators of ROBS plans. That means the ROBS provider can set up your C Corp and its 401(k).
- When setting up a ROBS, you’ll want a reputable and reliable ROBS provider. For example, Guidant has helped fund over 30,000 small businesses with this process. Unlike some other providers, Guidant ensures the ROBS plan closely follows IRS standards — mitigating the risk of IRS audits and protecting your business from penalty fees.
- Your ROBS provider also helps with the rollover process. With the rollover process, you can choose to move a certain amount of funds from your retirement plan into your C Corp’s 401(k). Once that transaction is complete, you can also move or “roll” the funds from your company’s 401(k) into your business — cash-rich and debt-free.
- Once the funds from your retirement plan transfer into the new retirement plan, it acts like a stock purchase or “angel investor.” That means your new 401(k) plan set up for your C Corp can invest in the stock of your business.
- With ROBS, there’s no payback schedule. It’s not a loan. It’s not a distribution. It’s not a taxable event. Your 401K is an equity partner. So, you can choose to remove ROBS just like any other equity partner. This is typically done by selling the business down the road or buying out your 401(k).
How do you know which ROBS provider is right for you? See How to Pick the Right ROBS Provider.
What are the Benefits of a ROBS?
- There are many potential advantages of using a ROBS, including being able to access large sums of capital quickly and easily without having to give away any equity interest in your company or worry about repaying any loans. Additionally, there are no restrictions on how you use these funds — they can be used for anything related to starting or growing your business, such as hiring employees, purchasing equipment and inventory, etc. This method is particularly appealing if you have multiple goals that require funding simultaneously.
- ROBS allows you to access your retirement funds without a withdrawal penalty fee or taxation. If you were to withdraw money from your 401(k) early, you’d be subject to both taxation and fees. But with a ROBS, you can access your retirement plan early — and use its capital to invest into your business immediately, instead of waiting years before you can access them.
Get the inside scoop on all the pros and cons of ROBS in The Pros and Cons of Rollovers for Business Startups.
Can ROBS be used with other business financing methods?
- Yes. ROBS can be used in conjunction with various business financing methods, making it one of the most flexible funding strategies for small business owners. For example, most of our clients at Guidant choose to finance their businesses with a combination of traditional SBA loans and ROBS.
Find out the truth of about financing your business with 401(k) financing in Debunking Common Myths About ROBS.
Business Financing Done Right the First Time
Small business owners and entrepreneurs now have access to more options than ever before when it comes to financing their ventures — one of those being utilizing 401(k) plans through ROBS arrangements.
With our latest webinar on “Everything You Need to Know About ROBS,” you’ll understand what it takes to get started with a ROBS — from setting up your C Corp, doing a rollover of funds from qualified retirement accounts into the newly created C Corp, understanding double taxation, and more.
If you’re looking for a deeper understanding of ROBS — and a personal evaluation to determine the best business financing solutions for you — our team of experts at Guidant is here to help. At Guidant, our goal is to make the ROBS process as easy for you as possible — so you can focus on making your business dreams come true.
Call us today at 425-289-3200 for a free, no-pressure business consultation to get started — or pre-qualify in minutes for business financing now!
“I owe a sense of gratitude to Guidant for helping me get here. It was a turning point for us moving forward.”
— Stephen Such, Falling Sky Brewing