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ROBS - A Unique Alternative for Starting or Buying a Business


ROBS – A Unique Alternative for Starting or Buying a Business

One of the key decisions when starting or buying a new business is how to fund the purchase or start-up. There are a lot of alternative ways to accomplish this task including:

  • Using your own after-tax funds to provide the necessary capital
  • Getting a loan through a traditional bank
  • Applying for a loan through the Small Business Administration (SBA)
  • Convincing angel investors, including your family members, that your business idea is worth investing in

The above list is not a comprehensive list, and you can produce several other ideas I have not mentioned. However, there is a strategy that few individuals have heard of that could be a very appealing alternative, depending on your situation. This strategy is known as Rollovers as Business Start-ups or ROBS, for short.

Rollovers as Business Start-ups is a way to use your pre-tax account(s) to fund your business penalty-free and tax-free, but you have to strictly follow the guidelines. One final note before we jump into the heart of the strategy – it is especially important to locate and work with a licensed ROBS promoter as it is paramount to stay in compliance with government regulations when setting up a ROBS transaction. Here are the five basic steps of how the ROBS structure is set up:


Step 1: Set up a new C Corporation

A new C Corporation must be established as the initial step. The business you start or buy must be able to sell Qualifying Employer Securities (QES) which is also known as corporate stock. Other entities, such as S Corporations or LLCs, are prohibited from selling QES.


Step 2: Set up a 401(k) plan for your new corporation

Once the new company has been created, a 401(k) plan needs to be set up. Most ROBS companies choose a traditional 401(k) plan as the company retirement plan of choice but other types of plans, such as defined benefit plans or profit-sharing plans, can also be established. Because the new 401(k) plan is a “special” plan that contains unique plan language that allows plan participants to purchase company stock, it is highly recommended that you work with a third-party administrator (TPA) who is familiar with these types of plans.


Step 3: Roll existing funds into the C Corporation’s new 401(k) plan

Now that the new company retirement plan has been set up, rolling your existing company retirement funds into the new plan is the next step. Since you are transferring the funds from one qualified plan to another, there are no distributions and therefore no taxable transactions and no penalties.


Step 4: The new company retirement plan buys stock in the C Corporation

Funds are now available in the company retirement plan as a result of completing Step 3. Now the retirement plan can purchase stock in the new C Corporation via a QES transaction. This is the primary reason the company was established as a C Corporation. The QES transaction would be prohibited otherwise, and the funds would not be available to make capital investments.


Step 5: Use the funds to run your business

The funds are now available to purchase equipment, lease or purchase a building, pay for franchise fees, etc.

These five steps are the basics of a ROBS transaction. While it may seem straightforward, it is a very complex transaction that requires the consultation of an expert to make sure all the regulations are met. Be sure to avoid the following events, as these will cause problems for you:

  • The plan that engaged in the ROBS transaction is not offered to other eligible employees of the corporation.
    • It is required by federal law that a company retirement plan that is used to engage in the ROBS business financing strategy be offered to all eligible employees of the corporation, both current and future.
  • IRS Form 5500 is not filed with the Department of Labor and the Internal Revenue Service.
    • While traditional company retirement plans do not have to file Form 5500 until assets reach $250,000, all business owners engaged in a ROBS transaction must file Form 5500. This is because ROBS company retirement plans own hard to value assets like private company stock and hence are required to file a Form 5500.
  • You decided to convert from a C Corporation to an S Corporation for tax purposes.
    • Many CPAs and advisors who are unfamiliar with the ROBS strategy recommend exactly the above strategy because they think you should avoid the double taxation profits are exposed to in a C Corporation. However, it is a foundational requirement of the ROBS strategy that a qualified company retirement plan, investing in the corporation by taking stock in return and hence becoming a shareholder of the company, report as a C Corporation to the federal government. There are ways to convert to an S Corporation but you would have to exit the ROBS strategy to do so.
  • You use the ROBS strategy to gain tax-free and penalty-free access to your company retirement funds.
    • The company using this strategy must be a bona fide, active operating company.


In summary, the ROBS strategy can be an excellent means of funding a business. Keep in mind, though, that the rules and regulations are very complex, and it is a necessity to work with an expert in this area when funding a business venture in this manner.

If you have questions and would like to talk with us further, please call us at 513-271-6777. For more THOR reading, click here to go to the Blogs and Market Updates section on our website.

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Written by

Mark F. Kleespies, CFP®

Mark joined THOR in January of 1997, and is the head of the Wealth Management team. His primary duties include working directly with clients and strategically planning the direction of the firm. Mark is a member of the Financial Planning Association and is a Certified Financial Planner.

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