Rollover for Business Startups (ROBS) explained

Starting a small business takes money — and so does buying a new one. If you’re having trouble getting the funds and have more than $50,000 in retirement savings, you might want to look into a Rollover for Business Startups (ROBS) arrangement.

This option allows you to invest your retirement funds in your business without paying any taxes, fees or interest. A ROBS isn’t available for all businesses, however, and it puts your retirement on the line.

What exactly is a ROBS arrangement?

A ROBS arrangement allows business owners to take funds from their retirement account and invest it — or “roll it over” — in their business. Since it’s not a loan, you don’t have to repay it. And since you aren’t technically withdrawing from your account, you won’t have to pay any income taxes or fees.

ROBS are popular with franchise owners, perhaps because of the common belief that this business model is less likely to fail than an independent startup — though that’s not necessarily true.

ROBS might be inexpensive up front, but they come with significant risks — one of the biggest is you could lose a large portion of your retirement savings.

Do I qualify for a ROBS?

Not every business or owner qualifies for a ROBS. You must meet these four requirements at the very least, though your provider might have other requirements.

Have an eligible retirement account

To be eligible for a ROBS, you must have a tax-deferred account — meaning that you don’t pay taxes until you withdraw from it. Some common tax-deferred accounts include:

• Traditional IRA
• 401(k)
• TSP
• SEP
• 401(3)
• Keogh

Roth IRAs and Roth 401(k)s aren’t eligible for a ROBS. Also, you generally can’t use an account set up through your current employer — most won’t let you roll over your funds.

Have at least $50,000 in retirement savings

While this isn’t a legal requirement, using an account with less than $50,000 may not be worth the cost. Also, most providers won’t work with accounts that have less than $50,000, meaning that you might have to do it yourself.

Start a C corporation

C corporations are type of tax status for corporations. Your business must have this tax status to be eligible for a ROBS.

How do C corporations work? They pay taxes on their annual revenue before their shareholders get their cut of the business. The shareholders then pay income tax on the already-taxed money they receive. New corporations are C corporations by default. To save on taxes, some file to become S corporations, which only pay taxes after shareholders get their funds.

C corporations might pay more taxes than S corporations, but they have less restrictions. For example, the IRS has no limits on how large a C corporation can grow, how many different classes of stock it can issue or the nationality of its shareholders. C corporations are also the only type of business entity that’s eligible for a ROBS.

Corporations, LLCs and other business structures explained

Be an employee of your new business

In other words, you have to actually work for your business, rather than just be a shareholder. And you can’t just put in a few hours a week. You need to be eligible for your business’s new retirement plan, which might require you to earn a certain income or work a minimum number of hours.

Where can I get a ROBS?

You can always roll over your funds yourself. But most business owners find that impractical and risky — the IRS has some complicated requirements and using a ROBS makes you more likely to get audited. Here are several providers that can help your business set up a ROBS.

How to set up a ROBS step by step

Generally, business owners follow these steps when setting up a ROBS:

Step 1: Compare providers

When you set up a ROBS, you’re technically taking advantage of a tax loophole. To avoid paying unnecessary fines, consider going with an expert. You can get started with the table above by considering the following factors:

• Setup costs. Most ROBS providers have an upfront cost of around $4,000 to $5,000.
• Fees. Many ROBS providers also charge a monthly or annual maintenance fee. Some also offer discounts, depending on how many employees you have.
• Services. Does the provider just set up your ROBS or does it offer other types of technical or legal support?

Step 2: Set up a C corporation

Your business must be a C corporation to set up a ROBS. You can do this by registering your business’s name with your state, filing a certificate of incorporation or articles of incorporation and paying a fee. The state agency you need to register with varies by state.

Once you’re registered, you need to draft corporate bylaws and hold at least one board of directors meeting. You also need to apply for an employer identification number (EIN). Your ROBS provider might be able to help you set up your C corp.

Step 3: Create a retirement and profit-sharing plan

The next step is to create a retirement plan that you and other eligible employees can sign up for. You can do this by creating a Retirement or Profit-Sharing Plan Adoption Agreement, in addition to a Plan Administration Agreement. Your ROBS provider is often able to help you with this step.

Some ROBS providers can help you find a company to manage your retirement account, though not all do.

Step 4: Roll over your funds

Now that you have your retirement account set up, you can start to roll over your funds from your old account into your new retirement account. You must roll over at least $50,000 for it to count as a ROBS. There’s no maximum amount you can roll over, however.

Step 5: Sell stock to your new retirement plan

The next step is to sell your company’s stock to your new retirement plan. You don’t need to sell all of it to your retirement plan — just enough to cover the costs you want to use your ROBS for. For example, if you wanted to cover half of your startup costs with a ROBS, you’d need to sell 50% of your company’s stock.

Once you’ve sold the stock, your company can use those funds however it needs.

Benefits and drawbacks to consider

Alternatives to ROBS

There’s a chance you don’t have enough money in your retirement account to cover all of the costs associated with starting a new business. It’s common for entrepreneurs to use a ROBS along with another type of business financing, including:

• Personal loan for business. Taking out a personal loan can help cover the cost of starting a business when you can’t qualify for a business loan just yet. This option is best for business owners that have good or excellent credit, since that will have more weight than in a business loan application.
• Fixed-term business loan. Need funds to buy a business? Most lenders let businesses use fixed-term business loans to cover the acquisition costs.
• SBA startup loans. You can apply for startup funding through the SBA loan program — though it can be difficult to qualify and time consuming to apply compared to other types of financing.
• Business line of credit. After your business has a few months under its belt, a line of credit could help it cover day-to-day expenses.
• Crowdfunding. Another interest-free option is raising the funds yourself through a crowdfunding platform. You’ll likely pay a percentage in platform fees and you could have to pay taxes on the funds you raise. But it’s generally less risky than a ROBS.

Bottom line

ROBS aren’t for every business. While you won’t have to meet credit or revenue requirements to qualify and can theoretically get access to a large amount of funds for free, it comes with several risks. Since it’s a complicated process that requires expertise, most businesses opt to hire a company — which isn’t cheap.

Curious about more business loan alternatives? You might want to check out our guide to business loans.

Frequently asked questions

• Can I change my business to a S corporation or LLC later?

  You can, but not as your ROBS funds are invested in your business. That’s because with a ROBS, your business’s retirement plan owns shares in the business. In S corporations and LLCs, only people or other businesses are allowed to own a business’s shares.

• What happens if my business fails?

  You’ll lose all of the funds from the retirement account you rolled over into your business.

• Can more than one person use their retirement funds for a ROBS?

  It’s possible for two people to combine their ROBS, but that can be even more complicated than your standard ROBS. In this situation, you might want to sign up for a consultation with a provider before you get started — most offer this for free.