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What is Rollovers as Business Startups (ROBS)?

When fishing buddies Don Poffenroth and Kent Fleishman first dreamed up Dry Fly Distillery in 2007, they placed high importance on finding affordable business financing. Here's what happened next:

Rollovers for Business Start-ups (ROBS) allows new and existing business owners to use their existing retirement funds to start or buy a business, without incurring tax penalties or taking a loan. Learn more about the benefits of this debt-free funding solution here.

When fishing buddies Don Poffenroth and Kent Fleishman first dreamed up Dry Fly Distillery in 2007, they placed high importance on finding affordable business financing. But with the costs of finding a location, purchasing distilling equipment and the other costs of launching a business, they faced the very real challenge of gathering enough cash to create the business they had in mind.

Neither the thought of draining their personal savings or taking a bank loan was preferable for Don and Kent. But their search for funding led them to a debt-free funding option called Rollovers for Business Start-ups (or ROBS for short). Also known as 401(k) business financing, this method allowed the two to use their retirement funds to start a business — without incurring tax penalties or getting a loan— and things moved quickly from there. Fast forward 10 years, and Dry Fly’s award-winning spirits can be purchased in 37 states and over 30 countries.

Dry Fly’s story of extraordinary success may seem out-of-reach for the average entrepreneur, but every year thousands of aspiring business owners are turning their dreams into reality and starting their business debt-free by funding with ROBS.

Let’s take a closer look at the process, regulations and advantages of funding a business via the ROBS arrangement.

How does Rollovers for Business Start-ups (ROBS) work?

The Rollover for Business Start-ups arrangement involves moving money from a new or existing business owner’s existing, rollable retirement account [such as an IRA or 401(k)] into a new 401(k) account, sponsored by the new company being funded. The new 401(k) plan then purchases stock in the private corporation being funded — similar to buying shares of stock in Microsoft or Amazon, except not on the public market.

a diagram showing how the rollover for business startups process works

Step 1: Set Up a New C Corporation: As required by the IRS, all companies funded through the ROBS arrangement must be C corporations.

Step 2: A New 401(k) Plan is Established: A new 401(k) plan must be established on behalf of the new C corporation, and the owner of the company becomes the trustee and plan administrator (this sounds intimidating, but most ROBS providers offer 401(k) plan administration services and do the hard part for you).

Step 3: Existing Retirement Funds Are Rolled into the New 401(k) Plan: Funds are rolled from the existing retirement account into the new 401(k) account. This step is the ‘rollover’ in Rollovers for Business Start-ups.

Step 4: The Stock Purchase: The 401(k) plan purchases private stock in the C corporation.

Step 5: The Corporation is Cash Rich. As a result of the stock purchase, the C corporation is now cash-rich. These funds can be used for business operations including funding a new business, purchasing an existing business or using the funds as a down payment on a business loan.

Is it legal to use Rollovers for Business Start-ups for small business financing?

Often, one of the first concerns that crosses an aspiring business owner’s mind when considering using their retirement funds to start or buy a business is the legality of the process. It sounds too good to be true: the ability to access one’s hard-earned retirement assets for business funding— all without paying any tax penalties, early withdrawal fees or monthly loan payments.

While there are a few important, rules and regulations to follow in order to maintain good standing with the IRS and DOL, ROBS is perfectly legal and has been since the ERISA law was passed in 1974. When congress passed this law, it shifted the responsibility of retirement savings from the employer to the employee, giving individuals more control over their savings.

Though the ROBS arrangement isn’t as well-known as many traditional financing methods, such as business loans, it’s gaining popularity (it ranked as the third most popular funding option in our 2018 State of Small Business survey) and has been utilized by entrepreneurs across the country. To date, Guidant Financial has helped over 16,000 entrepreneurs gain access to $4.2 billion in small business financing through the ROBS structure. And every year we help our clients complete the required annual filings in order to keep the funding structure in compliance. In fact, no Guidant client has ever failed an audit due to the ROBS setup.

The Benefits of Using Rollovers for Business Start-ups

For anyone looking to start, purchase or fund a new business, ROBS can serve as the bridge between the passion for entrepreneurship and the necessary funding. Some of the benefits to financing with ROBS include:

Fast Funding: The entire rollover process can be completed in as little as three weeks. Fast access to business funding is an integral component of purchasing a business, especially when working with business brokers, lenders or seller financing arrangements.

Debt-Free Financing: ROBS is not a loan, which means there are no monthly payments to make or interest to be repaid. Starting a business debt-free allows business owners to put money earned back into growing the business rather than paying lenders. In fact, it’s a large reason why businesses funded using ROBS see such high success rates. Eighty-one percent of Guidant’s ROBS clients were still in business after four years, compared to the industry average of 39 percent.

Increased Buying Power: ROBS funding can be used as the down payment on a small business loan or seller financing arrangement — making a business owner a more qualified borrower and increasing his/her total buying power.

Easy to Qualify: Unlike traditional business funding, ROBS has no minimum credit score or collateral requirements. The only qualification requirement is having at least $50,000 in a rollable, pre-tax retirement account.

Getting Started with ROBS for Small Business Funding

No matter what stage you’re at in the funding process, it’s always a good idea to pre-qualify for business financing. This gives you a high level view of which funding programs you qualify for and how much capital could receive (it’s probably more than you think). Pre-qualifying for ROBS can also help you understand whether you can access additional types of funding, such as an SBA loan.

After pre-qualification, the next step is to begin working with a ROBS provider. The most important topic to discuss with any potential ROBS provider is their experience in the industry — the more rollovers they’ve completed and more funding provided, the more likely they’ll know exactly how to help you in your unique situation. And among the many questions you ask of any potential provider be sure to ask about audit rates, legal support from an attorney representing your interests and an expert plan administration team — all of these elements are key to your business’s long term success when funding with ROBS.

Small business funding is the first and most challenging hurdle in most entrepreneurial journeys, but finding the right financing partner, understanding all of your options and investing in yourself are a few of the many ways to find success. Get started by learning how much small business funding you qualify for here. Who knows, maybe you and a fishing buddy have global success on your horizon.

Click here to navigate to a new page where you can enter your information to download a copy of our ebook about everything you need to know about robs.

Want to Use ROBS to Start a Business?

Our step-by-step Guide to Rollovers for Business Startups is a complete handbook of everything you need to know about using ROBS to start or buy a small business or franchise.

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