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When looking to finance a franchise or small business, you have a few options. While loans and lines of credit (known as debt-funding) are pretty common, one beneficial funding choice is using an existing retirement account through a Rollover as Business Startup (ROBS).

ROBS can provide you with tax-deferred and debt-free financing for a small business venture. By rolling a 401(k) from a previous employer over to a new 401(k) that invests in your company, you can put your hard-earned dollars to work quickly. However, ROBS must be executed correctly in order to avoid penalties or fees.

Top mistakes to avoid

If you’re pursuing ROBS to fund your new or existing small business, there are a few mistakes you should be aware of. Making these mistakes—especially in the formative months of your new business—could hamper your company’s success or cause legal trouble.

  1. Ignoring legal compliance: The biggest mistake an entrepreneur can make when leveraging ROBS for their business is misunderstanding or ignoring the requirements set by the IRS, or not using an IRS-approved plan. Failing to meet the IRS guidelines for ROBS could disqualify your plan, resulting in fees and taxes owed on the retirement funds you used. A few of the most common compliance issues include changing your corporation status away from a C corp, creating barriers to prevent employees from purchasing company stock, and not filing the proper paperwork.
  2. Using the wrong third-party administrator: Working with a third-party administrator (TPA) is the best, preferred way to ensure your ROBS is set up and maintained according to IRS guidelines. Your TPA should also work with you to ensure compliance. When exploring your options, inquire about the TPA’s experience, level of support, cost and past successes with ROBS.
  3. Investing the wrong amount: Deciding how much of the rolled-over retirement savings you want to invest in your business is not always as easy as it sounds. You obviously want to invest enough to make it worth your while and get your business on the right foot, but choosing to invest everything could be too great of a risk. You might also consider using ROBS alongside other funding vehicles, such as an SBA loan, because ROBS funds are approved for use as the non-borrowed cash injection needed for the loan.

ROBS works when done right

By staying mindful of the biggest mistakes that can doom a small business using ROBS financing, you can ensure you use ROBS entirely to your benefit. Mistakes can be costly, but working with a reliable provider, being careful about investment choices and maintaining compliance can ensure the best results and set your business up for success.

Tenet Financial Group has nine decades of combined funding experience, offers an IRS-approved plan, and administers all ROBS plans in-house. You’ll have a dedicated contact throughout the life of your business with Tenet and we’ll answer all your questions as we work together. Contact a Senior Consultant today to discuss whether or not ROBS is a good funding strategy for your business: (888) 901-3335, Option. 9.