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What Businesses Qualify for ROBS Financing? Eligibility Criteria Detailed

Are you looking for a way to fund your business dream without debt? Consider ROBS or Rollovers as Business Startups. This method lets you use money from your retirement accounts. You can do this without facing tax penalties. It's a way to start or buy a business that's different from taking out bank loans. It uses money you've already saved in a 401(k) or an IRA.

About half of all business owners have used their own savings to start their ventures. Only a quarter of them got a loan from the SBA. If starting a business or getting one off the ground is on your mind, ROBS might suit your needs perfectly. But what steps are involved, and what business types are eligible? This article will help you understand ROBS financing. We’ll cover why it may be a great choice and the businesses it can help easily.

Key Takeaways:

  • ROBS lets you jumpstart or own a business by using your retirement money without worrying about extra taxes.
  • It's a path to business ownership that avoids old methods like taking on loans.
  • The process includes establishing a C corporation, starting a company 401(k) plan, rolling over retirement money, and using these funds for business operations.
  • Many kinds of businesses can benefit from ROBS as long as it is legal in the US and run by a C corporation.
  • Choosing a trustworthy ROBS provider is critical to ensure all transactions are done correctly and in line with the law.

How do ROBS work?

ROBS, short for Rollovers as Business Startups, helps entrepreneurs fund their ventures tax-free. Here's the simple breakdown:

  1. Create a C corporation
  2. Start a 401(k) for it
  3. Move your retirement money into this 401(k)
  4. Use this money to buy the corporation's stock
  5. Now, use the purchased stock money for your business

This process lets business owners use their retirement savings without incurring hefty taxes.

Example ROBS Process

StepDescription
1Create a new C corporation
2Set up a company 401(k) plan for the new C corporation
3Roll existing retirement funds into the new company 401(k) plan
4The company 401(k) plan purchases the C corporation's stock
5The funds from the stock purchase can be used to operate the business

Are ROBS legitimate?

Yes, ROBS is a real way to get money for your business. It is backed by laws like the Employee Retirement Income Securities Act (ERISA) and the Internal Revenue Code.

It lets people use their retirement savings to start a business. But, it's important to pick a trustworthy ROBS provider who knows the IRS rules well.

With the right steps, entrepreneurs can fund their businesses without tax issues. A good ROBS provider smooths the legal process, making everything work without problems.

What businesses can be started with ROBS?

With some limits, ROBS lets you kick off almost any business in the US. The business needs to meet these rules to get ROBS support:

  1. The business should work under US laws and be US-based. Operations beyond US borders or illegal activities don't qualify for ROBS.
  2. Your business must sell products or services and be active. It can't be about putting money into things or just real estate.
  3. It has to be a C corporation. A C corp is needed to issue shares, which ROBS requires.
  4. The owner has to work at the business truly. They should play a real part and have duties within the company.

Examples of businesses that can be started with ROBS:

Business TypeDescription
RestaurantA place where people go to eat and drink.
Retail StoreA shop that sells things directly to people, either in a physical store or online.
Professional ServicesLike law, accounting, or consulting, these are businesses that offer specialized skills.
Technology StartupA startup that creates new tech items or services.

There are many more business types that ROBS can help launch. If the business follows the rules and is legal in the US, ROBS can be an option.

What is an ROBS “rollover”?

A ROBS “rollover” is a key part of using retirement funds to start or grow a business. It's transferring money from your 401(k) or IRA into a company's 401(k). This way, you can use the money to buy stock in your new business.

This method lets you start or expand your business using your own retirement money. It's a smart way to avoid taxes and debts. Plus, you keep full control of the business.

After the ROBS rollover, the stock you buy becomes part of your business. This money can fund many parts of your business, like startup costs or hiring staff. The aim is to help your business grow quickly and successfully.

Remember, the ROBS rollover is only a part of a bigger process. It's very important to follow all the steps correctly. This ensures your business financing is legal and successful.

How do I set up a ROBS?

If you're considering using ROBS to fund your business, you must know the steps. A good ROBS provider can make the process of starting a C corporation and a 401(k) plan easier. They help with the legal and admin parts.

The first step is to make a new C corporation. You'll pick a unique name and file papers with authorities. A trusted ROBS provider will help you do this right, following IRS and DOL rules.

Next, you make a company 401(k) plan. This lets you move your retirement funds. Your ROBS provider will help set up the plan. You will make sure it meets all the legal rules.

After you make the 401(k) plan, you move your retirement money into it. Your ROBS provider will help transfer the funds. It's important to do this correctly to avoid taxes.

Now, you buy stock in your C corporation with the money in your 401(k) plan. This gives your business the money it needs to start or grow. Your ROBS provider will make sure the stock buy follows IRS rules.

Choosing the right ROBS provider is very important. You should pick one that's well-known and skilled. They will help you follow the complex ROBS setup steps. With a good provider, you'll be sure you're doing everything legally. This way, using a ROBS to fund your business will be smoother, and you can focus on growing it.

Conclusion

ROBS financing is a special way for entrepreneurs to start or buy a business. This method avoids debt and keeps personal assets safe. The process includes creating a C corporation, making a company 401(k) plan, and rolling over your retirement funds.

This option lets you use your retirement savings to fund your business. It's a tax-smart choice for getting capital.

But, it's important to know the rules and risks of ROBS financing. Talking to a ROBS expert and a financial advisor is smart. They can guide you and help you make the right choices about your business money.

Working with these professionals, you can make the most of ROBS. It's a way to use your retirement funds and reach your business dreams.

Contact Exit Advisor today to optimize your acquisition plan using ROBS. Expert advice can streamline your purchase and ensure you make the most informed decisions. Ready to take the next step in your business acquisition journey? Contact us now for personalized guidance tailored to your unique needs.

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