Open Your Business Using 401(k) Rollover Funding

Because you have found your way to the Tenet Financial Group blog, you’re probably considering opening a new business, buying an existing business or franchise or looking for small business-related funding. If so, welcome to our blog! This particular blog is specific to one of our specialities called Rollover for Business Start Ups (ROBS) funding. You might have heard it called IRA Rollover funding or even Self-Directed 401(k) funding.

ROBS, in a nutshell, is a way that start up business owners can use their existing personal retirement funds (IRA, 401(k), etc.) to help open a new business, buy a franchise, purchase an existing business or recapitalize an existing business – tax-deferred and penalty-free. If you use a ROBS to help fund your start up business, the plan differs from a traditional business loan or other line of credit that some use to fund their businesses. In fact, ROBS isn’t a loan at all.

Here’s how it works (and exactly how Tenet Financial Group can help you use your retirement funds as a ROBS funding source):

  • Form a C Corporation – ROBS does not work for LLC, LLP, Sole Proprietorship or S Corporation because of IRS-related mandates, thus, a C Corporation is a must.
  • Create a 401(k) plan for the C Corporation – Next, determine what type of retirement plan you want to establish for the new business. Using a 401(k) plan is a widely-used retirement plan option for businesses in operation today.
  • Rollover funds from a personal retirement account plan to the company 401(k) plan – The transfer of your personal retirement funds to the company retirement plan must be done using funds not through your current employer’s plan (if you are still employed by another company and have not separated from that company). Once you separate from your current employer you can use your retirements funds for a ROBS. Other types of qualified retirement funding options that can be used with a ROBS include standard/traditional IRA, KEOGHS, Thrift Savings Plan (TSP-Military), Annuities, 457, 403b, SEP and Pension Plans.
  • The new Corporation 401(k) plan uses funds to purchase stock in the C Corporation – The new retirement plan can now purchase stock in the new C Corporation. Typically the number of shares that are given to the retirement plan are equal to the percentage of the funding the plan is providing for the business.
  • Proceeds from the sale of the stock are used to start up a new business or franchise, purchase an existing business or recapitalize a business – The new C Corporation now has access to the funds it needs to launch and the journey of business ownership ensues.

Using a ROBS has many benefits, but here are some key benefits to using a ROBS to help open a new business, buy a franchise, purchase an existing business or recapitalize an existing business:

  • This is not a loan. In fact, ROBS are based on using creditor protected assets (your retirement account) for the funding and are not subject to the same terms as other loan types. To learn more about creditor protected assets, check out this Tenet Financial Group blog.
  • This is not a retirement funds distribution, so no taxes or penalties are assessed against you when you use a ROBS.
  • ROBS funding can be used for any business expense, including paying your employees.
  • ROBS can and are often used in conjunction with other types of funding such as SBA loans, personal savings/cash injection, funding from business partner or other investor in the start up business.

Sounds pretty straightforward, right? ROBS are an excellent use of retirement funding to help start up businesses/franchises get up and running fairly quickly (within 3-4 weeks).

With more than 75 years of combined experience, Tenet Financial Group team has helped thousands of businesses obtain the funding they need to get started.  No client of Tenet Financial Group has ever been audited by the IRS, we welcome the opportunity to work with your attorney/ CPA to make sure your business begins on solid footing related to its financial needs, and we stay with our clients throughout the life of their business to make sure their plan administration is done correctly.

Contact us today to discuss your funding needs and our experienced financial advisors will work to understand your business needs and walk you through a variety of funding options that could suit your needs, including a ROBS.