What to Know About Rollover as Business Start-up (ROBS)

Are you in need of start-up funds for your new business? ROBS, (rollover as business start-up), can be an alternative to taking out a business loan. Our guide will help you understand how ROBS works and whether it’s the right decision for your new business.

What is ROBS and how does it work?

ROBS involves rolling over funds from your retirement account and using them to fund a start-up business. ROBS requires you to have either a 401(k) or an IRA account, so you can roll funds over into the business’ account.  

There are several steps to making a ROBS transaction:

• Register your business as a C corporation – Only C corporations are eligible for ROBS.
• Set up a retirement account – You will also need to set up a retirement account for your new business.  
• Rollover funds – Funds will need to be rolled over from your current retirement account to your new retirement account.
• Buy stock in your company- The funds in your new retirement account can be used to buy shares of stock in your own company. Once you sell those shares, you can use the newly acquired funds to finance your business.

Note that ROBS isn’t only for new start-up businesses. It can also help entrepreneurs purchase established businesses and franchises. Working with a plan provider with ROBS experience can ensure a smooth and accurate process.

What are the advantages of ROBS?

When you rollover your funds, they go from your retirement account and into your new business. Because you’re not withdrawing those funds, you won’t need to pay taxes or face penalties for an early withdrawal.

What are the disadvantages of ROBS?

Rollover as business start-up, (ROBS), can help you gain the finances needed to get your business started.

However, there are a few details that you’ll need to consider when deciding to take the ROBS approach:

• Must be a C corporation: Your business will not qualify for a ROBS plan unless your company is registered as a C corporation.
• Additional fees: A ROBS account comes with fees for set-up and plan administration. Talk to your retirement provider about what fees you can expect.
• Risk to retirement: Borrowing funds from your retirement account will cut into your retirement savings. There is also a risk to your savings if your business fails.

What are the Alternatives to ROBS?

ROBS may not be a realistic or even possible option for all business owners. You may want to explore other options if you’re unwilling or unable to borrow from your 401(k)-retirement account.

The following are potential avenues that you could also consider.

• Personal Loans: You can receive a personal business loan to start your business. Several factors will determine if you qualify for a loan such as your credit history. Take note that you’ll be responsible for the debt whether your business succeeds or not.
• Business credit cards: Your ability to qualify for a business credit card may depend on your personal financial history rather than your business history. Be sure to discuss with your financial advisor whether business cards alone are right for your business needs.  
• Startup grants: A grant can also serve as a cost-effective option for gaining start-up funds. While the application process can be competitive, you won’t have to pay the grant back if you receive one.

Conclusion

If done correctly, ROBS can help you get your business on its feet, so you’ll feel empowered to make it thrive.