Dreaming of Buying a Franchise or Starting a Business but Can’t Find Financing?
Consider a ROBS (Rollovers as Business Startups) for using your retirement accounts to do so.
By Peter Rizzo
We have many clients and prospective clients that have had dreams of buying a franchise or starting their own business and have come to us asking how they can use their retirement accounts to make that dream a reality. We are now affiliated with an organization that will make that dream a reality.
How does a ROBS work?
In this type of transaction, funds from eligible retirement accounts, including a 401(k) or a traditional individual retirement account, are rolled over in most cases with the help of an attorney or a ROBS provider and invested in a new business or franchise, or used to buy or put money into an existing business. Here’s what happens.
- A C corporation — a corporate structure that allows shareholders — is formed. Then a new 401(k) plan is created for the business.
- The owner’s existing retirement accounts are rolled into the new 401(k) plan. Most retirement accounts qualify.
- The rolled-over funds are used to purchase company stock in the C corporation. The proceeds from the sale of stock is the cash that’s invested in the business.
It’s an alternative way to finance your business. Lenders typically require strong personal credit, positive cash flow and collateral for loan approval.
Rollovers as Business Startups is an option for an entrepreneur who has built up retirement savings but who may not otherwise qualify for a business loan.
You won’t take on debt. A ROBS isn’t a loan. You don’t have to worry about monthly repayments, incurring high interest fees or defaulting. You can reinvest more of your profits into the business, which is critical for newer businesses.
You won’t pay penalties or taxes. Withdraw funds directly from a 401(k) or IRA before turning 59½, and you’ll get hit with a 10% early withdrawal penalty and face a distribution tax. You avoid those with a ROBS.
Does this work with the Solo 401K as well?
Generally the Solo 401(k) needs to be converted to “normal” 401(k) that is subject to ERISA, because the franchise will typically have employees other than the owner. This type of structure requires a number of Department of Labor exemptions be employed to stay compliant, so generally a C-Corp is created, and a new 401(k) is sponsored by the C-Corp. That’s a long way of saying, you’ll need to employee a separate structure to make this work.
Can the business that’s ultimately invested in by the newly formed C corp be run/owned by a family member who was otherwise excluded in the original solo401k?
Hey David – yes, a family member defined in 26 USC 4975(e)(F) can be an employee of the franchise and participate in the company’s profit-sharing plan. They wouldn’t be an owner, since the plan itself would own the business.