A Rollover as Business Startup (ROBS) is a financing strategy that allows entrepreneurs to use their retirement funds—typically from a 401(k) or IRA—to fund a new or existing business without incurring early withdrawal penalties or taxes. While ROBS can be a powerful funding tool, it is complex and must be implemented correctly to comply with IRS and Department of Labor (DOL) regulations.
How ROBS Works
ROBS allows an entrepreneur to invest their retirement funds in their own business through a specific legal structure. Here’s how it works step by step:
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Create a C Corporation
- ROBS requires a C Corporation (C-corp) because only C-corps can issue stock that qualifies for the transaction.
- An LLC or S Corporation cannot be used for a ROBS structure.
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Establish a New 401(k) Plan
- The new C-corp sponsors and adopts a qualified 401(k) plan with rollover provisions that allow employees (including the founder) to roll over funds from an existing retirement account.
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Rollover Existing Retirement Funds
- The founder rolls over funds from an existing 401(k), 403(b), IRA, or other eligible retirement plan into the new C-corp’s 401(k) plan.
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The 401(k) Plan Purchases C-Corp Stock
- The new 401(k) plan invests in employer stock issued by the C-corp. This means the retirement account owns shares of the new company.
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The Business Receives the Investment
- The C-corp receives funds from the stock purchase and can now use them to finance the startup’s operations, including hiring employees, leasing office space, buying inventory, etc.
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Operate the Business Under Compliance
- The business must maintain compliance with IRS and DOL regulations, including offering the 401(k) plan to eligible employees and filing necessary tax documents.
Key Benefits of ROBS
- Tax-Free & Penalty-Free Funding: Since the funds are rolled over (not withdrawn), there are no early withdrawal penalties or taxes.
- No Debt Obligation: Unlike loans, ROBS does not create debt or require repayments.
- Cash Flow Advantage: The business starts with liquid capital rather than loans with interest payments.
- No Credit Check Required: Ideal for founders with limited access to traditional funding.
Risks & Considerations
- IRS & DOL Scrutiny: ROBS is legal but highly regulated. Non-compliance can lead to severe tax penalties.
- Requires a C-Corp: Many small businesses prefer LLCs or S-Corps, but ROBS mandates a C-corp structure, which can result in double taxation.
- Ongoing Compliance Costs: Expect to incur legal, accounting, and administration fees for compliance, including:
- Filing an annual Form 5500 for the 401(k) plan.
- Performing nondiscrimination testing to ensure employees have fair access to the retirement plan.
- Business Viability Risk: If the business fails, the founder risks losing retirement savings.
- Limited to Eligible Retirement Accounts: Only certain qualified retirement accounts can be used.
Step-by-Step Implementation of ROBS for a Startup Founder
If a startup founder wants to use ROBS, the process typically follows these structured steps:
Step 1: Determine Feasibility
- Evaluate if the business model is viable.
- Confirm the founder has at least $50,000+ in eligible retirement funds (typically the minimum amount for a cost-effective ROBS setup).
- Consider alternative funding options (e.g., SBA loans, equity investments) before proceeding.
Step 2: Set Up a C-Corp
- Form a C Corporation in the state where the business will operate.
- Obtain an Employer Identification Number (EIN) from the IRS.
Step 3: Establish a Qualified 401(k) Plan
- The C-corp must create a new 401(k) plan that allows for rollovers and employer stock purchases.
- Ensure the plan is designed to meet IRS and DOL regulations.
Step 4: Transfer Retirement Funds
- The founder initiates a rollover from their existing 401(k) or IRA into the new C-corp’s 401(k) plan.
- Since this is a rollover (not a withdrawal), no taxes or penalties apply.
Step 5: Invest in Company Stock
- The new 401(k) plan purchases shares of the C-corp in exchange for cash.
- The company now has funding from the sale of stock.
Step 6: Use the Funds for Business Operations
- The business can now use the capital for:
- Hiring employees
- Purchasing inventory
- Securing office space
- Covering startup costs
Step 7: Maintain Ongoing Compliance
- Annual Reporting: File Form 5500 with the IRS.
- 401(k) Plan Administration: Offer the 401(k) to eligible employees.
- Fair Compensation: The founder should pay themselves a reasonable salary to avoid IRS scrutiny.
- Monitor Regulations: Stay compliant with IRS and ERISA (Employee Retirement Income Security Act) rules.
Who Should Consider ROBS?
ROBS is best suited for: ✅ Founders who want to use their retirement savings instead of taking on debt.
✅ Entrepreneurs with at least $50,000+ in a qualified retirement plan.
✅ Business owners willing to structure their company as a C-corp.
✅ Those comfortable with strict compliance requirements and fees.
Who Should Avoid ROBS?
🚫 Founders who do not want to operate a C-corp.
🚫 Those with less than $50,000 in retirement funds (due to high setup costs).
🚫 Entrepreneurs unwilling to offer a 401(k) plan to employees.
🚫 Those who need pass-through taxation (e.g., LLCs, S-corps) for tax efficiency.
Costs of Setting Up a ROBS
- Initial Setup Costs: $5,000 – $7,000 (paid to a third-party ROBS provider)
- Annual Administration Fees: $1,200 – $2,000 per year for compliance and 401(k) plan management
- Legal & CPA Fees: Varies depending on complexity and compliance needs
Conclusion
ROBS can be an effective way for startup founders to finance their businesses without loans or investor dilution, but it requires strict regulatory compliance. If done improperly, the IRS and DOL can impose severe penalties, making professional guidance essential.