Not all options for business startup funding are accessible to all entrepreneurs. Many factors like credit score, income, and available collateral contribute to whether or not an entrepreneur will be able to fund his or her dream business or franchise. However, if you have an existing retirement account, you might be eligible for ROBS small business funding.
A Rollover as Business Startup (ROBS) is a financing structure that lets you use the retirement funds you’ve saved your entire career to capitalize your business. This debt-free, penalty-free, tax-deferred funding method has been an IRS-approved funding method since the 1970s and is generally a FAST funding option as well.
Here’s what you need to know about whether you’re eligible to use ROBS to help launch your business.
Base requirements for ROBS
In order to use your retirement savings to capitalize your small business or franchise under ROBS, you’ll need to meet these base eligibility requirements:
- Have a traditional retirement account: ROBS requires a traditional retirement account to roll funds into your new business’s 401(k). If you have an existing traditional 401(k), 403(b), 457, non-Roth IRA, Keoghs, Thrift Savings Plan or SEP, you can use that plan in your ROBS.
- Retirement fund is from a former employer: The funds you plan to use for ROBS must be held in a retirement account from a previous employer—not your current one. If you are still employed with the company that holds your retirement plan, you’ll need to leave that company before you’re eligible to use those funds. In some instances, an in-service option is available, but it’s rare.
- You are a legitimate employee of your business: Entrepreneurs who use ROBS to launch or capitalize a business must be a legitimate employee of the business. This means that you have to play a full-time role in running the business, rather than be a hands-off investor. Additionally, you can pay yourself a salary using ROBS funding.
- Your business must be incorporated as a C-Corp: In order for your retirement funds to be invested in the business, your company must be incorporated as a C-Corporation. This structure allows you to legally use your new retirement plan to purchase stock in the company.
- Have enough retirement savings: The final requirement that will make you eligible for ROBS funding is having enough money saved in your retirement account. Typically, you need at least $50,000 to best utilize a rollover due to the fees involved.
ROBS is an accessible funding method
When compared to other funding methods like loans, ROBS is an accessible method of launching a business. Most aspiring entrepreneurs are eligible to use their hard-earned retirement savings to make their business dreams a reality—all it takes is a qualifying retirement account and a firm understanding of ROBS regulations.
If you want to explore if ROBS is the right choice for your business, get in touch with a third-party administrator to check your eligibility and get started. Tenet Financial Group has extensive experiencing installing and managing ROBS structures for thousands of small business owners. Fill out the form on our website to have a no-obligation discussion with a Senior Consultant.