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Rollovers as Business Start-ups (ROBS) are a specialized funding strategy that allows entrepreneurs to use their 401(k) or IRA retirement funds to invest in a business without incurring early withdrawal taxes or penalties. In a ROBS arrangement, you roll over money from a tax-deferred retirement account into a new 401(k) plan for your company, and that plan buys stock in your business (Rollovers as business start-ups compliance project | Internal Revenue Service). This effectively injects your retirement savings into the company as working capital. Business owners and financial professionals often ask whether ROBS can be used for an existing business, not just new startups. The answer is yes – you can use a ROBS to fund or buy an existing business – but it comes with important requirements, benefits, and risks to understand. This article will explain the ROBS framework, how it applies to existing businesses, the pros and cons, compliance and tax considerations (from both the IRS’s and CPAs’ perspective), alternative funding options, and why a proper Business Valuation is critical in any ROBS transaction.
A Rollover as Business Start-up (ROBS) is a financing method recognized by the IRS that enables business owners to use their retirement funds to start or buy a business tax-free (Guidelines regarding rollover as business start-ups). It is not a loan or a withdrawal; instead, it’s a rollover of funds from an existing retirement account into a new company’s retirement plan, which then invests in the stock of the company (Rollovers as business start-ups compliance project | Internal Revenue Service). Essentially, your new or existing business sets up a qualified retirement plan (usually a 401k), and your personal retirement money is rolled into that plan and used to purchase shares of your C-corporation (the business). The process can be summarized in steps:
From a regulatory standpoint, ROBS are legal under U.S. law – they are enabled by provisions of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code that allow qualified plans to invest in employer stock (). The IRS has confirmed that ROBS are not considered an abusive tax avoidance scheme in and of themselves (Rollovers as business start-ups compliance project | Internal Revenue Service). However, they do raise compliance concerns if not administered correctly (since in a ROBS, essentially your entire 401k is investing in your own company). The IRS launched a compliance project in 2009 to monitor ROBS, noting that while they allow a tax-free business funding, such plans are “questionable” if they solely benefit one individual and if plan rules are not properly followed (Rollovers as business start-ups compliance project | Internal Revenue Service) (Rollovers as business start-ups compliance project | Internal Revenue Service). In other words, you must adhere to all the normal rules for qualified retirement plans and corporate stock transactions, even after the initial rollover is done.
Key ROBS Requirements: Two of the most important requirements to stay compliant are: (1) The business must be a C-corp, as mentioned (this is non-negotiable for ROBS) (Rollovers for Business Startups ROBS FAQ - Guidant), and (2) The new 401k plan must be offered to all eligible employees once the business is operating (Rollovers as business start-ups compliance project | Internal Revenue Service) (ROBS Transactions - Be Very Careful of Using Retirement Funds to Start a Business - Dinesen Tax). The 401k plan cannot just benefit you; if you hire employees who meet plan eligibility (typically one year of service, age 21+ in many plans), they must be allowed to participate in the retirement plan and buy company stock through the plan if they wish. Failing to extend the plan to employees would be discriminatory and could disqualify the plan (Rollovers As Business Startups: 4 Most Common Compliance Issues | Leading Retirement Solutions) (Rollovers as business start-ups compliance project | Internal Revenue Service). You’ll also need to file annual reports (Form 5500) for the plan and maintain proper records, as the plan is a separate entity holding company stock. In summary, ROBS is a complex structure with several moving parts, but when done correctly it lets you tap your retirement funds to invest in a business without upfront tax costs, effectively financing your company with your own money.
ROBS are often marketed as a way to finance a brand-new business or franchise, but they can also be used for an existing business. In fact, you can use ROBS to buy an existing business or to inject capital into a business you already own and operate () (Rollovers As Business Startups: 4 Most Common Compliance Issues | Leading Retirement Solutions). The core structure is the same as described above – it still requires creating a C-corp and a qualified plan to purchase stock – but there are special considerations when the business isn’t a fresh startup.
Buying an Existing Business: If you want to purchase an existing company (for example, buying out an owner or buying a franchise resale), ROBS can provide the equity for the purchase. Many new franchise owners have used ROBS to fund buying an existing franchise or business because it allows them to acquire the company without taking on debt (). The retirement plan funds would be rolled into the new C-corp you establish, and that C-corp in turn buys the target business (or its assets). In this scenario, the ROBS structure functions like the down payment or full purchase price for the acquisition. The IRS and industry data indicate this is a common use of ROBS – you can “start a business from scratch, purchase an existing business, open a new franchise location or even buy an existing one” with ROBS (). For example, if you want to buy a local manufacturing company for $500,000, you could form a new C-corp, rollover your $200,000 401(k) into the new plan, have the plan buy $200k of your corp’s stock, and use that $200k plus (if needed) a loan for the rest to purchase the company. The result: you now own the business via your C-corp, and your 401k plan owns stock in that C-corp.
Funding Your Own Existing Business: If you already own a business (say an LLC or S-Corp you founded years ago) and you need capital to expand or shore up finances, you can use ROBS, but you’ll likely need to restructure a bit. Practically, this means converting your company into a C-corporation (if it isn’t one already) and issuing stock to the new 401k plan. For instance, an LLC can be incorporated or merged into a C-corp; an S-corp can revoke S status to become a C-corp. Once the C-corp exists, the process is similar: create the 401k plan, rollover funds into it, and have the plan buy newly issued shares of the C-corp. Those new shares inject cash into the business’s bank account which can be used for expansion, hiring, buying equipment, or any other operational needs (Can Existing Businesses Convert Using ROBS? — Tenet Financial Group) (Can Existing Businesses Convert Using ROBS? — Tenet Financial Group). In essence, you are recapitalizing your company with your retirement money. Many growing companies have used ROBS to open additional locations or provide working capital for growth (Can Existing Businesses Convert Using ROBS? — Tenet Financial Group).
Preparation Steps: Using a ROBS for an existing business will involve some upfront work:
Converting to a C-Corp: As noted, only C-corps are eligible for ROBS funding (Rollovers for Business Startups ROBS FAQ - Guidant). If your business is currently a sole proprietorship, partnership, LLC, or S-Corp, you must convert it to a C-Corporation. This may involve filing articles of incorporation or, in the case of an S-Corp, filing a statement with the IRS to revoke S-Corp status (Can Existing Businesses Convert Using ROBS? — Tenet Financial Group). All owners should agree to this, since it changes how the business is taxed (C-corps pay corporate tax, and shareholders then pay tax on any dividends). Once converted, you’ll have a stock structure to work with.
Install a 401(k) Plan for the Company: Next, adopt a qualified retirement plan for the C-corp. Many ROBS providers will help set up a plan that meets all IRS requirements (often a profit-sharing 401k plan). Ensure the plan allows for investing in employer stock. At this point, you, the owner, will typically be the only participant in the plan (if no other employees yet or if they are not yet eligible).
Roll Over Personal Retirement Funds: You will then roll over the desired amount from your personal retirement account into the new company’s 401k plan. Generally, the funds must come from an eligible tax-deferred account (such as a 401k from a previous employer, a traditional IRA, 403b, etc.). Note that if your money is in a current employer’s 401k, you might need to leave that job or use an “in-service rollover” (if allowed) to access those funds (Rollovers for Business Startups ROBS FAQ - Guidant) (Rollovers for Business Startups ROBS FAQ - Guidant). Many people use funds from a former employer’s 401k or a rollover IRA. You do not have to roll all your retirement savings – you can roll just a portion (though providers often recommend at least $50K to make it cost-effective) (Rollovers for Business Startups ROBS FAQ - Guidant).
The Plan Buys Stock in Your Company: The rolled-over funds, now in your company’s 401k trust account, are used to purchase shares of your C-corp. If it’s an existing business with an established value, you will need to decide on a fair valuation for the stock (more on valuation below). Often, the corporation will issue new shares equal to the amount of cash the plan is investing. For example, if your business is valued at $500,000 and you roll $250,000 from your 401k, the plan might buy a 50% stake in the company (this is a critical step where a professional Business Valuation is highly recommended). The money from the stock sale goes into the corporate bank account as paid-in capital. Now the 401k plan is a shareholder of the company (and by extension, you still benefit, since the plan assets are for your retirement).
Use the Funds and Follow Compliance Rules: With new cash in the business, you can deploy it to fund operations, open new locations, buy equipment, etc. You will also work as an employee of the business (ROBS rules require that the retirement plan investor be involved in the business – it’s not for passive investments). You are allowed to pay yourself a salary for your work; in fact, drawing a reasonable salary is encouraged because it means you can also contribute new funds back into your 401k plan from your wages (). Going forward, ensure you offer the 401k plan to any eligible employees and file the required annual forms (Form 5500 for the plan, corporate tax returns, etc.). The business operates like any other C-corp, except that one of its shareholders is your 401k plan.
Using ROBS for an existing business can be a smart way to fuel growth with your own investment. It essentially lets you diversify your retirement portfolio into your own company. However, it’s crucial to set it up correctly. Most people work with experienced ROBS professionals or attorneys to handle the setup paperwork and ensure IRS compliance (the process involves multiple legal documents, plan adoption, corporate filings, etc.). Once the structure is in place, you have the freedom to run your business with the injected capital.
Case Example: Suppose you started a brewery as an LLC a few years ago and it’s doing well, but you need $200,000 to purchase canning equipment and expand distribution. You have $300,000 sitting in a rollover IRA from a previous job. You could incorporate your brewery as a C-corp (let’s call it New Brew Inc.), set up a 401k for New Brew Inc., rollover $200k from your IRA into the plan, and have the plan buy $200k worth of New Brew Inc. stock. Now, New Brew Inc. has $200k cash from the stock sale to buy equipment, and your IRA funds are now held in your New Brew 401k, invested in the company’s stock. You continue to draw a salary from the company as brewmaster/CEO (and can even defer some of that salary into the 401k plan each year). Over time, if the expansion succeeds, the business value grows, which means the stock in your 401k hopefully grows. When you eventually sell the brewery years later, your 401k would receive proceeds for its share of the stock, replenishing your retirement fund (or you could do a tax-free rollover of the stock into a new retirement plan if you start another venture). This example illustrates how an existing business can leverage ROBS for expansion. Of course, if the business were to fail, your 401k would lose that investment, which is why one must carefully weigh the risks (discussed below).
Using a ROBS to fund an existing business can offer several key advantages compared to traditional financing or withdrawals:
No Debt or Loan Payments: ROBS funding is equity financing. You’re using your own money, so the business doesn’t incur debt and no monthly loan payments or interest are required. This can be a huge advantage for cash flow. Many small businesses struggle under the burden of loan repayments in the early years – ROBS avoids that by providing debt-free capital (Rollovers As Business Startups: 4 Most Common Compliance Issues | Leading Retirement Solutions). You don’t need to qualify for a loan or worry about your credit score, and there’s no lender dictating terms. By financing with your retirement funds, you essentially act as your own investor.
No Tax Penalties on Rollover: Normally, pulling money out of a 401(k) or IRA before age 59½ triggers income tax and a 10% early withdrawal penalty. ROBS sidesteps these costs. The rollover into the new plan is a tax-free event, and the plan’s purchase of stock is allowed by IRS rules (Guidelines regarding rollover as business start-ups). This means you preserve the full value of your retirement assets to put to work in the business. For example, taking a $200k distribution from a 401k outright could cost perhaps $60k+ in taxes and penalties, leaving you with only $140k to invest. With ROBS, the entire $200k can be invested in the business. The IRS explicitly notes that ROBS “allows newly created businesses to retrieve available tax-deferred funds... avoiding all otherwise imposable distribution income and excise taxes” (Guidelines regarding rollover as business start-ups). In other words, you get to use your retirement money tax-deferred for the business instead of having to sacrifice a large chunk to the IRS upfront.
Fast Access to Funding You Already Own: Because it’s your money, once the ROBS structure is in place, you can access the funds relatively quickly. There’s no lengthy bank underwriting process. This can be crucial if you need to capitalize on a time-sensitive opportunity (like buying a business that’s on the market) or inject cash quickly to solve a business crunch. You are tapping into “patient capital” that was otherwise locked away until retirement. Many entrepreneurs prefer to bet on themselves and their business rather than leave money in stocks or mutual funds. ROBS lets you redirect those retirement investments into your own company, which you may feel gives you more control over your financial destiny.
Fund Expansion or Recapitalization: For existing businesses, ROBS can be a way to raise capital without bringing in outside investors. If you don’t want to dilute your ownership by issuing equity to a new partner or investor, using your retirement funds via ROBS essentially issues equity to your own retirement plan. You remain in control of the company’s operations (the 401k is not an outside person; it’s effectively you in another capacity). This can be appealing to business owners who need money but don’t want a bank or new partners involved. It’s also an option if the business wouldn’t easily qualify for a loan due to limited collateral or history – your retirement funds don’t have those constraints.
Can Serve as SBA Loan Down Payment: If you do plan to get a loan, ROBS can help with that too. Frequently, ROBS is used in combination with an SBA loan or other financing. For example, the Small Business Administration’s 7(a) loans often require the borrower to inject ~10-20% equity of their own into a business purchase or project. ROBS funds count as equity (not debt), so they can be used as the down payment on an SBA-backed loan (Rollovers for Business Startups ROBS FAQ - Guidant). In fact, it’s quite common: someone might use $100k from ROBS as the 20% down payment and borrow the remaining $400k via an SBA loan to buy a $500k business. Using ROBS in this way means you borrow less and meet the SBA’s requirement of having “skin in the game” with your own funds (Rollovers for Business Startups ROBS FAQ - Guidant).
Continued Retirement Savings & Potential Growth: Even though you are using your retirement money, it’s not as if it disappears – it’s now invested in your business’s stock inside your 401k. If the business grows, the value of that stock grows tax-deferred, potentially increasing your retirement nest egg. Additionally, because you have established a new 401k plan for the company, you can continue contributing to your retirement. You can pay yourself a salary from the business and defer part of it into the 401k each year (up to annual contribution limits). You might even set up an employer match or profit share contribution to your plan as the business profits increase. All of this means you’re still saving for retirement, just in a different way. Some ROBS providers note that having a company retirement plan is a nice benefit for owners and any employees – you’re essentially starting a new retirement program that can grow over time (Can Existing Businesses Convert Using ROBS? — Tenet Financial Group). And if the business becomes very successful, you could later sell it and roll the proceeds within the 401k into a diversified portfolio or even into another business via a ROBS again. (Important: Always keep in mind the risk that if the business fails, the retirement investment could be lost – more on that in Risks below.)
No Interest or Repayment to Yourself: Unlike borrowing from your 401k (which has a $50k limit and requires paying yourself back with interest), a ROBS is not a loan. You don’t have to repay your 401k. The funds are essentially an equity investment. This can relieve personal financial stress – for instance, if you had taken a 401k loan or home equity loan to fund the business, you’d be on the hook to pay it back regardless of business performance. With ROBS, if the business does well, your 401k benefits; if it struggles, you don’t owe payments (though you could lose the money). It aligns the fate of your retirement funds with the success of the business.
Legal and IRS-Acknowledged Method: Using a ROBS is a legitimate funding strategy when done correctly. It’s built on established law. The IRS has issued guidance (and even favorable determination letters on individual plans) confirming that this structure is permissible (Rollovers as business start-ups compliance project | Internal Revenue Service). The IRS and Department of Labor have rules in place for ROBS, and many reputable financial firms specialize in setting them up in compliance with those rules. Knowing that ROBS is IRS-approved (when compliant) can give business owners and their CPAs peace of mind that they are not engaging in something shady or illegal (). It’s essentially a form of self-directed investment allowed under ERISA. Of course, the legality is contingent on following all applicable rules – which is why compliance is so important, as discussed next.
In short, ROBS can be an attractive option for business owners who have substantial retirement savings and want to invest in themselves. It provides funding without going into debt, letting your business start or grow with a stronger balance sheet. And for an existing business, it can be a lifeline to fund new projects or ownership changes internally, leveraging money you’ve set aside for the future. Many entrepreneurs consider it diversifying their retirement – instead of 100% in the stock market, they put some into their own business equity. If you believe strongly in your business’s prospects, ROBS offers a way to back that belief with your own capital, tax-free upfront.
While the benefits are significant, using a ROBS for an existing business also comes with major risks and caveats. Both the IRS and experienced CPAs urge caution, because these arrangements are complex and can have serious consequences if things go wrong. Here are some of the key risks and downsides to consider:
Risk to Retirement Savings: The most obvious risk is that you are putting your nest egg on the line. If your business fails or underperforms, your retirement plan (which now owns stock in the business) will suffer. The IRS’s own compliance project found that a majority of ROBS-funded startups they examined ended up failing, leading the owners to lose both their business and their retirement money (Rollovers as business start-ups compliance project | Internal Revenue Service). Unlike a diversified mutual fund in a 401k, your business is a single, illiquid investment – it’s inherently higher risk. There is no insurance (like FDIC or PBGC) protecting a 401k invested in a private company. If the company’s value drops to zero, your 401k’s value drops accordingly. Business owners must realistically assess their business prospects and be willing to accept that worst-case scenario: “What if the company is a flop? You’ve just lost your retirement account.” (ROBS Transactions - Be Very Careful of Using Retirement Funds to Start a Business - Dinesen Tax). For many, that is an unacceptable risk; for others who are confident and have other assets, it may be worth it. But the possibility of losing decades of retirement savings is the primary danger of ROBS. Essentially, you are trading market risk for entrepreneurial risk.
Compliance Complexity: ROBS are sometimes called a “compliance nightmare” by accountants (ROBS Transactions - Be Very Careful of Using Retirement Funds to Start a Business - Dinesen Tax) because you have to obey both corporate law and ERISA retirement plan law simultaneously. After the initial setup, ongoing compliance is crucial. You must administer the 401k plan in accordance with IRS/DOL rules: that means tracking participant eligibility, providing plan disclosures, allowing eligible employees to join, and not unfairly benefiting only yourself. If you accidentally exclude employees from the plan or create other disparities, you could engage in a prohibited transaction or disqualify the plan (Rollovers As Business Startups: 4 Most Common Compliance Issues | Leading Retirement Solutions) (Rollovers as business start-ups compliance project | Internal Revenue Service). The IRS noted issues where some ROBS sponsors amended the plan after funding to prevent new participants from buying stock – that kind of move is illegal and can jeopardize the plan’s qualified status (Rollovers as business start-ups compliance project | Internal Revenue Service). You will also need to file an annual Form 5500 for the plan (even if only you participate). Many ROBS entrepreneurs didn’t realize this and failed to file, thinking it was a “one-participant” plan exempt from filing – but IRS clarified that exemption does not apply to ROBS plans because the plan owns the business, not an individual (Rollovers as business start-ups compliance project | Internal Revenue Service) (Rollovers as business start-ups compliance project | Internal Revenue Service). Failing to file required forms or follow plan rules can result in penalties and plan disqualification, which would trigger taxes on the money that was rolled over (plus potential penalties). In practice, most ROBS-funded businesses hire a third-party administrator (TPA) or the ROBS provider to help manage the plan compliance – this is an added ongoing cost but usually necessary to avoid mistakes.
Upfront and Ongoing Costs: While not a risk per se, it’s important to note that setting up a ROBS isn’t free. There are professional fees to establish the C-corp and retirement plan properly. Many ROBS providers charge a setup fee (often in the $4,000–$5,000 range) and then monthly or annual fees (several hundred dollars a year) to administer the plan. You may also incur legal or CPA fees to ensure everything is done right. Over a number of years, these fees add up. One tax advisor noted that the taxes and penalties you save by doing a ROBS might end up similar to the fees and compliance costs you’ll pay over time (ROBS Transactions - Be Very Careful of Using Retirement Funds to Start a Business - Dinesen Tax) – essentially, you pay consultants instead of the IRS. For some, that trade-off is fine, but you should be aware of the financial overhead. Additionally, because your business is now a C-corp, you’ll have corporate tax returns to file (Form 1120) which could be more complex than a simple LLC return, potentially raising your accounting costs.
Double Taxation Considerations: C-corps face the issue of possible double taxation of profits (taxed at the corporate level, and again if distributed as dividends to shareholders). In a ROBS scenario, however, this is somewhat mitigated because the main shareholder is a 401k (which is tax-exempt). If your C-corp eventually pays dividends, any portion going to the 401k is not taxed (the plan doesn’t pay tax on investment earnings). Of course, if down the road you take distributions from your 401k, those would be taxed as ordinary income. Many small C-corps avoid paying dividends altogether and instead reinvest profits or pay the owner a salary/bonus (which is tax-deductible to the corporation). It’s worth planning with a CPA to minimize any double-tax inefficiencies. For example, reasonable salaries to owner-employees, profit-sharing contributions to the 401k, and other strategies can reduce corporate taxable income (Rollovers for Business Startups ROBS FAQ - Guidant) (Rollovers for Business Startups ROBS FAQ - Guidant). In summary, double taxation is a factor but can often be managed so that it “can be mitigated or avoided with the help of a qualified tax professional.” (Rollovers for Business Startups ROBS FAQ - Guidant). Nonetheless, operating as a C-corp means you don’t get pass-through taxation, so you should be comfortable with corporate tax rules.
ERISA Fiduciary Duties: When you set up the 401k plan and direct it to invest in your company, you (and possibly other plan trustees) are taking on fiduciary responsibility for managing that plan in the participants’ best interest. Since currently you are the main participant, it’s your own interest, but if you add employees, you have to prudently handle the plan for their benefit too. Investing a high percentage of plan assets in a single stock (your company) can be viewed as risky for participants – though it’s allowed because participants direct their investments (you directed your rollover into company stock). If down the line other employees join the plan, you likely should diversify their contributions (they can still choose to buy company stock, but you can’t force them to). There’s a bit of a grey area in how fiduciary standards apply to a plan heavily invested in its own company. To stay on the safe side, be transparent with any employees and let them make their own investment choices. Also, as a fiduciary, you must avoid self-dealing – transactions between the plan and the company should only be the stock purchase and normal plan operations. You should not, for example, have the plan lend money to the company or vice versa, or pay yourself excessive compensation, etc., that could be seen as benefiting you to the detriment of the plan. The IRS has warned that ROBS “may solely benefit one individual” (the founder) (Rollovers as business start-ups compliance project | Internal Revenue Service), so they keep an eye out for abuses. Staying compliant and treating the plan fairly is essential to avoid prohibited transactions.
Difficulty in Valuation and Exit: When your retirement plan holds private shares of your company, it can be challenging to value those shares over time. Initially, you’ll set a stock price when the plan buys in. After that, you should periodically value the company (for plan reporting and if any distributions occur). Unlike publicly traded stock, there’s no market quote for your business. You may need professional appraisals for the company’s stock periodically – especially if you or the plan later sell stock to a new investor or if the plan needs to distribute assets (e.g., if you retire or an employee in the plan needs to roll over their account, you might have to pay them their account value, which depends on the company’s value). One CPA highlighted this issue: “Valuation. You’d have to figure out some way of valuing the stock so you knew how much your account was worth.” (ROBS Transactions - Be Very Careful of Using Retirement Funds to Start a Business - Dinesen Tax). Without a clear valuation, you might not know the true stake of the 401k or how much it has gained/lost. Moreover, exiting the investment can be tricky. Your 401k can’t easily sell its shares unless the business itself is sold or you arrange a buyback. If you reach retirement age and want to start withdrawing from the 401k, you may need to find a way to get cash for those shares – possibly by the company redeeming stock or paying dividends. But if the company doesn’t have liquid assets, this could be difficult: “What if your account balance is higher than the cash the company has in the bank when you’re ready to take your money out?” (ROBS Transactions - Be Very Careful of Using Retirement Funds to Start a Business - Dinesen Tax). In the worst case, your ability to retire comfortably might hinge on selling the business. While this risk is similar to any entrepreneur counting on a business for retirement, it’s amplified when the business is your retirement account. Planning an exit strategy is important – you might decide to sell the business at a certain age, or start diversifying by taking some profits and rolling them into other investments within the plan (if possible). Until a liquidity event occurs, your retirement funds are tied up in a non-liquid asset.
Potential IRS Audits and Scrutiny: ROBS arrangements do draw extra attention from the IRS and Department of Labor. The IRS had a dedicated project looking at ROBS, and while they did not ban them, they identified common issues and continue to monitor them (Rollovers as business start-ups compliance project | Internal Revenue Service) (Rollovers as business start-ups compliance project | Internal Revenue Service). If the IRS flags your plan for examination, they will look for any operational failures (e.g., not offering the plan to employees, improper valuation of stock, not filing forms, using plan funds for personal use, etc.). The IRS found many ROBS businesses didn’t file required 5500 or corporate tax returns, which can trigger audits (Rollovers as business start-ups compliance project | Internal Revenue Service) (Rollovers as business start-ups compliance project | Internal Revenue Service). While audits are not super frequent, the possibility is there. This means as a ROBS business owner, you should keep your paperwork very organized: document the stock purchase, keep records of the valuation used, minutes from any corporate meetings approving the stock issuance, proof that you offered the 401k to new employees, and so on. It’s wise to have a good CPA or advisor review your compliance annually. If an issue is found, sometimes it can be corrected through IRS correction programs, but if not, the consequences could include the plan being disqualified retroactively (making that rollover taxable after all, plus penalties) or other fines. To be clear, ROBS itself is not a red flag for illegality – but any misstep in maintaining it can raise problems. The IRS specifically pointed out trouble areas in ROBS like “valuation of assets” and plans being amended to exclude employees (Rollovers as business start-ups compliance project | Internal Revenue Service). Knowing this, you can be proactive: get professional valuations and don’t try to game the plan rules.
UBIT (Unrelated Business Taxable Income) – usually not an issue: A technical note: Some folks worry whether a 401k plan investing in an active business will owe Unrelated Business Income Tax. Generally, 401k plans (unlike IRAs) investing in employer stock are not subject to UBIT on the business’s operating income. The C-corp pays its own taxes, and dividends to the plan are typically tax-free to the plan. UBIT can apply to retirement plans in certain cases (for example, an IRA investing in a partnership or debt-financed property). In ROBS, the structure is specifically a C-corp, so the plan holds stock and any gains would come as appreciation or dividends. The plan could incur UBIT if, say, the corporation was a pass-through entity or if the plan had other investments that are debt-financed, but with a straightforward ROBS, UBIT isn’t usually a factor. One CPA mentioned “issues with UBIT” as a potential concern (ROBS Transactions - Be Very Careful of Using Retirement Funds to Start a Business - Dinesen Tax), but that likely was referencing if someone attempted a different structure. With a proper ROBS (C-corp and 401k), UBIT shouldn’t hit the plan’s investment in the business’s stock. Always check with a knowledgeable tax advisor for your specific situation, but most ROBS plans do not pay UBIT on the operating business income.
Loss of Other Retirement Benefits: By moving a large portion of your retirement funds into your business, consider the opportunity cost. Those funds are no longer invested in a diversified retirement portfolio. You might miss out on market gains if your business doesn’t perform as well as the stock market would have. Additionally, if you had creditor protection or other benefits for funds in an IRA/401k, once invested in the business, those funds are subject to business risks and creditors. (However, note that the 401k’s ownership of the stock might still be seen as a plan asset, which could have some protection in bankruptcy – a complex area to discuss with an attorney.)
Despite these risks, many business owners proceed with ROBS because they believe in their business and are willing to take the gamble with their retirement money. To manage the risks, planning and professional guidance are key. Engage a reputable ROBS provider or consultant to set things up correctly. Have a CPA or third-party administrator monitor your plan each year. Keep personal and plan finances separate (remember, the money rolled into the plan is no longer personally yours until you eventually take distributions; it’s owned by the plan on your behalf). Pay yourself a reasonable salary but not an exorbitant one – the IRS expects compensation to be “reasonable” for the work you do () (paying an unreasonably high salary could be seen as a way to funnel plan money to yourself). Basically, treat your ROBS-funded business as you would any professionally run corporation with minority shareholders (in this case, your 401k) – with proper corporate governance and financial controls.
One of the smartest steps you can take to address both compliance and risk management is to get a Business Valuation and maintain updated valuations over time, which we’ll discuss next. This helps ensure that the stock transactions between your retirement plan and your company are done at fair market value, avoiding any hidden tax traps.
Business Valuation plays a critical role in any ROBS arrangement, especially when an existing business is involved. The valuation of the company determines how much ownership your retirement plan receives in exchange for the funds, and it supports the IRS’s requirement that transactions be done at fair market value (to avoid giving yourself an unfair advantage or committing a prohibited transaction). Both the IRS and financial professionals strongly recommend obtaining a professional valuation during a ROBS setup (Rollovers as business start-ups compliance project | Internal Revenue Service).
Here’s why a valuation is so important:
Setting the Stock Price Fairly: When your 401k plan buys stock in your company, the price per share (or percentage of ownership for a given dollar amount) should reflect what an independent third party would pay for that stake in the business. If your business is brand new with no assets, often the valuation is simply equal to the cash being invested (e.g. the plan puts in $100k for 100% of the stock, so the company is valued at $100k at startup). But if you are using ROBS for an existing business that already has assets, revenue, or goodwill, you need to assess the total value of the business. For instance, if your company is worth $500,000 and your plan invests $250,000, it should receive roughly 50% of the stock. If you instead gave the plan 10% for $250k, that would imply a $2.5 million valuation – far above fair market – effectively enriching you as the original owner because the plan overpaid. Conversely, if you gave the plan 90% for $250k (implying a $278k valuation), you’d be shifting too much value to the plan and perhaps draining your personal stake improperly. Either scenario could be seen as not acting in the plan participants’ best interest or even as an impermissible transfer of value. A professional valuation ensures the stock issuance is done at a justified price, aligning with IRS expectations that the plan not pay more or less than fair market value for the shares.
Compliance and Audit Protection: The IRS flagged “valuation of assets” as one of the specific problem areas in ROBS examinations (Rollovers as business start-ups compliance project | Internal Revenue Service). If audited, they may ask how you determined the share price for the stock purchase. Having a documented valuation report at the time of the transaction is your best defense. It shows you engaged an independent expert to appraise the business and based the transaction on that analysis, evidencing good-faith compliance. If no valuation was done, the IRS might argue the transaction was arbitrary or benefited the owner improperly. In worst cases, an incorrect valuation could be construed as a prohibited transaction (for example, if the owner “sold” their shares to the plan for an inflated price to get more cash – that would violate self-dealing rules). Using a credentialed Business Valuation professional helps avoid these issues. It’s similar to how ESOPs (Employee Stock Ownership Plans) are required to have valuations for buying company stock; while a ROBS 401k isn’t exactly an ESOP, it shares the characteristic of a retirement plan investing in employer stock, so valuation is critical.
Investor & Partner Transactions: If later on you bring in outside investors or decide to sell the business, having periodic valuations will help you negotiate based on reality and ensure the 401k plan (as a shareholder) gets its fair share. It also helps in case you as the founder want to personally buy some shares back from the plan or issue new shares – you’d do those at an updated appraised value to keep everything arm’s length. Essentially, treating the plan as a separate investor with proper valuation protocols keeps you out of trouble.
Accounting for the Investment: Your CPA will need to record the 401k plan’s equity in the business on the company’s books (in the equity section). The initial capital injection will be recorded as common stock and additional paid-in capital. The valuation justifies that entry. Additionally, the 401k plan’s custodian may want to know the value of the plan’s holdings each year. Since it holds private stock, the value isn’t readily available on a stock exchange; a valuation provides a basis for the plan statements. Some plan administrators will accept a realistic estimate for a year or two, but it’s wise to get a professional valuation regularly (annually or bi-annually, or whenever a major event occurs that could affect value). This helps you and any plan participants see how the retirement investment is doing.
Addressing CPA and Investor Concerns: Sophisticated stakeholders, such as your CPA or any co-owners, will be much more comfortable with a ROBS transaction if a solid valuation report backs it up. CPAs often worry that without a valuation, it’s unclear how much of the company the retirement plan should own. We’ve heard questions like: “How do we decide what my 401k buys and what it’s worth?” The answer is to get an independent valuation of the business. By doing so, you turn a potentially murky transaction into a transparent one at arm’s length. It’s one of the first things a knowledgeable CPA or attorney will recommend when executing a ROBS: get a business valuator involved. Not only does this fulfill a compliance need, but it also adds a layer of credibility to your business’s financial planning.
Given the above, engaging a professional Business Valuation service is highly recommended when using ROBS for an existing business. Ideally, the valuation should be done before the stock purchase (or contemporaneously) to set the purchase price. If the business is a pure startup, the valuation might be straightforward (equal to cash invested), but an expert can still document that properly. If the business has significant operations, the valuation might involve analyzing financial statements, comparables, and cash flows to determine a fair market value. This isn’t typically something the average business owner or even CPA can do in a fully objective way for their own company, which is why a third-party valuation specialist is valuable.
Simply put, a Business Valuation is an investment in the integrity of your ROBS transaction. It helps ensure that your retirement plan is paying a fair price and not getting a raw deal (or giving one). It also provides you, as the owner, with insight into your company’s value – which is useful for many reasons beyond ROBS. And if you ever need to explain your ROBS to an IRS agent or a skeptical partner, you can show them the valuation report to demonstrate that everything was done fairly and by the book.
(At Simply Business Valuation, we specialize in providing independent, defensible business valuations for scenarios just like this – helping ROBS-funded businesses establish the fair value of their stock.)
ROBS can be a powerful tool, but they may not be suitable or available for everyone. Some business owners either can’t use ROBS (maybe they don’t have enough in retirement funds, or their funds are in a plan that doesn’t allow rollover while they’re still employed), or they decide the complexity and risk to their retirement aren’t worth it. If you determine that ROBS isn’t viable or you want to compare other funding strategies, consider the following alternatives:
Traditional Small Business Loans: Taking on a loan is the most common way to finance a business. This could be a term loan from a bank, a line of credit, or equipment financing. The U.S. Small Business Administration (SBA) guarantees loans (such as the SBA 7(a) loan) that can offer favorable terms – low down payments and long repayment periods – for small businesses. You’ll typically need good credit and some collateral or personal guarantee. The upside of a loan is that you don’t put your personal retirement assets at direct risk (beyond the guarantee). The downside is debt service – you have to make payments regardless of business performance, and too much debt can strain a young business. However, if you only need, say, $50k–$150k, a loan or even a business credit card or line of credit might be simpler and plenty sufficient, avoiding the need for ROBS.
401(k) Loan to Yourself: Instead of the complex ROBS structure, one simpler (but limited) option is to take a loan from your 401(k) if your plan permits it. Most 401k plans allow loans up to 50% of your vested balance, capped at $50,000. This is not taxable as long as you repay it (usually within 5 years, with interest). The benefit is it’s quick and doesn’t involve the IRS beyond the normal loan rules. You’re paying interest to yourself. The drawback is you can only get a relatively small amount (max $50k) and if you leave your job you might have to repay quickly. Also, the money you borrow will not be invested in the market while it’s loaned out, potentially missing gains. A 401k loan could be useful in combination with other funds – e.g., you use a $50k loan as part of your down payment on a business along with other cash. It’s far simpler than ROBS, but it can’t fund a large purchase on its own due to the cap.
Savings or Non-Retirement Investments: Using personal savings, after-tax investment accounts, or even home equity is another path. For example, rather than tapping a 401k (pre-tax money), you might use a Roth IRA (which you can withdraw contributions from tax-free) or a brokerage account by selling some stocks. If you have equity in your home, a home equity loan or line of credit can provide funds (though then your house is on the line). While these options may incur taxes (selling investments might trigger capital gains) or risks (home equity loan payments), they avoid the ERISA entanglements. Some owners also use personal credit (credit cards or personal loans), though those can carry high interest. It’s generally better to use cheaper money (like a home equity line at a low rate) than high-interest credit. In any case, using personal non-retirement funds means you aren’t endangering protected retirement money and don’t have to set up a C-corp unless you want to.
Bringing in Investors/Partners: Instead of financing it all yourself, you could bring in a business partner or outside investors to inject capital. This might involve selling a share of your business (equity) to an angel investor, venture capital (if a high-growth startup), or even friends and family who provide funding. While this dilutes your ownership, a partner’s money doesn’t have to be paid back like a loan, and you aren’t risking your 401k. Of course, giving up equity means sharing future profits and some control. But for many businesses, especially those that can’t support debt payments, equity investment is the lifeblood that helps them grow. An added benefit is that an experienced investor might also bring expertise or connections. If you were considering ROBS because you needed, say, $250k, but you’re uneasy about risking your retirement, you might instead sell 25% of your company to an investor for $250k. You retain 75% ownership and have a partner interested in the company’s success. Just make sure to structure any partnership with clear agreements – and incidentally, you’ll likely still need a Business Valuation to negotiate the equity sale!
Self-Directed IRA (with Caution): Some people ask if they can use a self-directed IRA to invest in their business. Important: Directly using an IRA to fund a business you control is generally prohibited by IRS rules. The IRS does not allow IRAs to engage in transactions with “disqualified persons,” which include yourself as the account owner (Retirement topics - Prohibited transactions | Internal Revenue Service) (How to Avoid Self-Directed IRA Prohibited Transactions). So you cannot simply have your IRA buy stock in your own company – that would be a prohibited transaction, blowing up the IRA’s tax-deferred status and incurring penalties. ROBS was essentially designed as a workaround using a 401k because 401k rules under ERISA allow the plan to invest in employer stock under certain conditions. If you only have an IRA, one approach some take is to roll the IRA into a 401k (via a ROBS provider’s help) and then do the ROBS. But trying to use an IRA by itself is not viable if you’re going to be personally involved in the business. On the other hand, if the business is something you won’t personally work in, a self-directed IRA could invest, but that’s a different scenario (not our focus here, since most owners are actively involved). Bottom line: ROBS is the only legal way to use retirement funds to invest in a business you actively run without immediate taxes (How to Avoid Self-Directed IRA Prohibited Transactions). If ROBS doesn’t appeal to you, you should look at non-retirement funding sources instead.
Partial ROBS and Mix-and-Match: Remember, it’s not all-or-nothing. You could choose to do a partial ROBS – for example, roll over $50k from your 401k to get some equity in, and also take an SBA loan for the rest, or use $50k of personal savings. This reduces how much of your retirement is tied up, while still avoiding taking on too much debt. Some franchisors see buyers use ROBS to cover the down payment and initial franchise fee, then finance other costs with a loan. You have flexibility to combine methods.
Keep Working and Save More: If the timing isn’t crucial, one “alternative” is to delay the venture until you have more capital through regular savings. Perhaps you keep your day job another year or two and accumulate cash to invest, or wait until you’re 59½ so you could withdraw from a retirement account with no penalty (you’d still owe taxes, but not the extra 10%). This isn’t so much a financing method as it is a strategy to reduce risk by starting a bit later with more of your own non-retirement money.
Each funding option has pros and cons in terms of cost, risk, and complexity. The right choice depends on your personal financial situation, the amount of money needed, and how much risk you’re willing to take on personally. In some cases, a hybrid approach works well (for example, use an SBA loan for the bulk and ROBS for the equity injection). Before deciding, it’s wise to consult with a financial advisor or CPA who understands small business financing. They can help you compare the long-term cost of a loan (interest) versus the potential cost of ROBS (lost retirement growth + compliance fees) versus giving up equity to an investor.
For many, the decision might come down to: “Do I want to risk my retirement savings directly, or would I rather pay someone else (a bank or investor) to share or take that risk?” There’s no one-size-fits-all answer. Some entrepreneurs have successfully used ROBS and later said it was the only way they could have made their business dream a reality. Others have used alternate paths and kept their retirement funds completely separate from the business. The good news is, you have options – just be sure to weigh them carefully.
Q: Can I use ROBS to invest in a business I already own and operate?
A: Yes, you can – provided you convert your business to a C-corp and follow the ROBS setup process. ROBS isn’t limited to brand-new startups. Existing business owners can roll over retirement funds into a new 401k plan and have that plan purchase stock of the company, injecting capital. The business must be structured as a C-corporation, and you as the owner need to be an employee of the company drawing a salary (which is usually the case if you work in your business). Essentially, you’re swapping out some of your personal equity for your 401k’s equity. This can fund expansions, new equipment, hiring, or any need the business has (Can Existing Businesses Convert Using ROBS? — Tenet Financial Group) (Can Existing Businesses Convert Using ROBS? — Tenet Financial Group). Just remember that after the transaction, your retirement plan is a shareholder of the company, and all compliance requirements still apply. Many owners have successfully used ROBS to “grow an existing business” with an infusion of cash (Rollovers As Business Startups: 4 Most Common Compliance Issues | Leading Retirement Solutions). It’s recommended to get a professional valuation of your business before the transaction so you know how much stock to give the 401k plan for the money it’s investing (ensuring the trade is fair).
Q: Does my business have to be a C Corporation to do a ROBS? Why not an LLC or S-Corp?
A: Yes – it must be a C corporation. This is a strict requirement of the ROBS structure (Rollovers for Business Startups ROBS FAQ - Guidant). The reason is that only C-corps can issue qualified employer securities (QES), which is the stock a qualified retirement plan is allowed to purchase. S-Corps and LLCs won’t work: an S-Corp can’t have a 401k plan as a shareholder (IRAs/401ks are not eligible S-Corp shareholders under tax law), and an LLC is typically treated as a partnership or disregarded entity, which also can’t have a 401k as an owner. Additionally, S-corps are limited in number of shareholders and type of shareholders, and a retirement plan doesn’t qualify. By using a C-Corp, you create a separate legal entity where the ownership can be split between you and your 401k plan. While C-corps do introduce the possibility of double taxation, this structural requirement is non-negotiable for ROBS. Most ROBS providers will help you set up a C-corp or convert your existing entity into one. All ROBS arrangements operate through C corporations (Can Existing Businesses Convert Using ROBS? — Tenet Financial Group). If you’re currently an LLC or S-Corp, you’ll have to convert – talk with an attorney or service provider on the best way to do that (it could be via merger, election change, or new entity formation). Keep in mind, converting to a C-corp means adapting to corporate taxation and governance, but it’s the only path to use your retirement funds in this manner.
Q: Is using a ROBS legal and approved by the IRS? Will it trigger an audit or problems with the IRS?
A: ROBS is legal – it is explicitly allowed by IRS and ERISA provisions, as long as it’s done correctly. The IRS has acknowledged that ROBS arrangements are a legitimate way to finance a business (). In fact, ROBS has been around for decades, and the IRS even issues determination letters on the 401k plans that are used in ROBS to confirm they meet the requirements. So you are not doing anything illegal or hidden; it’s an IRS-recognized strategy (sometimes called 401(k) business financing). However, the IRS is wary of ROBS plans because they’ve seen many done poorly. They do not consider ROBS itself an “abusive tax avoidance” scheme (Rollovers as business start-ups compliance project | Internal Revenue Service), but they have labeled them “questionable” when one individual is benefitting and if the plan isn’t properly maintained (Rollovers as business start-ups compliance project | Internal Revenue Service). The IRS did a review project and found many ROBS plans failed to follow all the rules, prompting them to issue guidelines. If you follow the rules – maintain a qualified plan, offer it to employees, avoid prohibited transactions – then you should remain in good standing. Using ROBS might slightly increase your audit risk only because the IRS knows of the common pitfalls. It’s important to work with knowledgeable professionals and keep excellent records to satisfy the IRS that your plan is compliant. The bottom line: ROBS is not a tax loophole or scam; it’s grounded in law (). But it requires ongoing compliance. If you do get audited, having your paperwork in order (plan documents, valuation, filings) and possibly the support of your ROBS provider or a CPA will go a long way. In summary, don’t be afraid of ROBS from a legality perspective – just be diligent. Thousands of Americans have used ROBS to fund businesses. The IRS knows this and as long as you play by the rules, you’re simply utilizing an available financing method, not evading taxes. (Pro tip: Consider getting a determination letter for your new 401k plan from the IRS – some providers do this – which, while not ironclad, shows the IRS pre-approved the plan’s structure (Rollovers as business start-ups compliance project | Internal Revenue Service).)
Q: What ongoing compliance tasks do I have to do after funding my business with ROBS?
A: After the initial transaction, your responsibilities include:
In summary, post-ROBS you need to run two parallel things: a business and a retirement plan. The business tasks are what any business owner does (pay taxes, pay workers, etc.), and the plan tasks are what any 401k sponsor does (give employees the opportunity to contribute, keep plan records, file 5500). It’s not overly burdensome if you have help and if you’re aware of it. Many find that after the initial adjustment, the ongoing maintenance is manageable – often the TPA handles most of the plan stuff for a monthly fee. The key is not to “set it and forget it” completely. Stay organized, maybe set a calendar reminder for plan deadlines (like filing due dates or enrollment dates), and you’ll be fine. If compliance feels daunting, lean on professionals – their fees are part of the cost of using ROBS, and well worth avoiding the alternative (which could be plan disqualification or penalties if you mess it up on your own).
Q: What happens to my 401k investment if my business fails or goes bankrupt?
A: If the unfortunate happens and your business fails, the money your 401k plan invested will likely be lost, or significantly reduced. The 401k owns stock in your company – if the company becomes worthless, that stock is worthless too. In a bankruptcy liquidation, secured creditors and other higher-priority claims get paid first; equity shareholders (including your plan) are last in line and usually get nothing. So the consequence is your retirement account balance will reflect that loss. For example, if your plan invested $200k for stock and the business folds, the value of that stock could drop to $0, and your 401k’s statement would now show $0 for that investment (in practice, you’d eventually terminate the plan and formally recognize the loss). There’s no special protection for the plan’s investment just because it’s a retirement account – it’s treated as equity like any shareholder’s stake. You do not owe the 401k plan the money back; the loss is borne by the plan (and thus your retirement). This is precisely the biggest risk of ROBS: you can lose retirement savings. On top of that, if the business fails, you might also personally be in a tough spot (lost income, etc.), so it can compound financial hardship. It’s worth noting: the plan’s loss might have a silver lining in tax terms if you had after-tax basis or other tax attributes, but generally 401k losses aren’t directly tax-deductible to you (since it was pre-tax money). It’s just an unfortunate outcome. The IRS observed that in many ROBS failures, owners not only lost their retirement funds but sometimes also ended up with personal bankruptcies or liens (Rollovers as business start-ups compliance project | Internal Revenue Service), likely because they had other loans or guarantees. In short, ROBS does not shield you from business risk – it shares the risk.
If you see the business failing, you might try to salvage any remaining value. For instance, if you can sell off equipment or IP, the plan, as shareholder, should get its share of any residual value. If you can sell the company even at a fire-sale price, the plan might recoup some fraction. But if it’s a total loss, the plan must swallow that. The plan can be terminated after the business ends, and you’d report to the IRS that the plan’s assets (the stock) became worthless. There is a mechanism for a 401k to distribute worthless stock – essentially you’d distribute it (a worthless certificate) to yourself and the plan ends; there’s no tax because worthless, but you also don’t get any cash.
It’s a grim scenario, but it’s the trade-off for not paying taxes up front – the IRS got no taxes initially, and in return they expect that if things go south, they won’t bail out your retirement. This is why we stress not to put all your retirement eggs in one basket unless you’re fully prepared for that outcome. Some people mitigate this by only rolling over part of their retirement (keeping some in safer investments), or by having a spouse’s retirement account untouched as a fallback, etc. Also, even if the business fails, you gained the experience and any salary you drew, so it’s not a total loss in life – but financially, your 401k will feel the hit.
Q: Will I have to pay taxes when my 401k (ROBS) plan eventually sells the business or I retire?
A: The initial rollover and investment is tax-free, but down the road normal tax rules apply to distributions from the plan. Let’s break it into two events:
One thing to note: Because your company is a C-corp, it could also pay dividends while you own it. If the corporation issues a dividend, the 401k plan would receive that dividend for any shares it owns. That dividend is not taxed when received by the plan (since it’s plan asset). It would just increase the cash in the 401k. If you personally owned some shares outside the plan, your dividends would be taxable to you (likely at dividend tax rates). Many ROBS owners do not issue dividends; they either leave profits in the company or pay themselves extra salary or bonus (which is deductible to the corp and taxed as wages to you). That avoids the double-tax on dividends altogether. If the 401k is 100% owner, paying dividends doesn’t make a lot of sense, as it’s just moving cash from the corp to the plan (which you anyway control), and could actually be counterproductive if you needed to reinvest in the business (plus corp already paid tax on those profits). So usually, you let value build and take it out upon exit.
In summary, no taxes upfront, but yes taxes eventually when you personally withdraw in retirement (just like any 401k). The benefit of ROBS is that hopefully when you do pay taxes in retirement, it’s on a much larger amount because you grew the business value – and you deferred taxes all those years in between. From a planning perspective, after a successful business sale, you might roll the plan into an IRA and then consider strategies like gradual withdrawals or Roth conversions if advantageous, to manage the tax hit. This is something to discuss with a financial planner at that stage. The key point is: ROBS doesn’t avoid tax forever; it defers it. If your business booms, Uncle Sam will eventually get a cut when you enjoy your retirement funds, but by then you’d gladly pay taxes on a larger amount than have paid them on a smaller amount upfront.
Q: Do I need a professional appraisal or valuation for my business when using ROBS?
A: It is highly recommended to get a professional Business Valuation, especially if your business has any significant value prior to the ROBS or if it’s an existing company with revenues/assets. While not explicitly mandated by law in every case, an appraisal provides critical support that the stock transaction between your 401k and your company is fair. The IRS has indicated that lack of proper valuation is a common compliance issue (Rollovers as business start-ups compliance project | Internal Revenue Service). If your business is brand new (a true startup with no operations), a valuation might simply conclude the company’s fair value equals the cash being invested (since it has minimal assets otherwise). Even then, documenting that is useful. If it’s an existing business, you should have it valued by an independent expert so you know, for example, is the business worth $1 million or $200k, and thus how much stock $100k from your 401k should buy. A valuation helps protect you from later IRS claims that you shifted value inappropriately. It also gives you a benchmark to measure the business’s performance going forward.
Many ROBS providers will require or strongly suggest an initial valuation (especially if you’re buying an existing business – often the purchase price in that case is the de facto valuation, but you’d appraise if you’re injecting into one you already own). Additionally, if your corporation will be issuing shares to your 401k plan, you might need to set a price per share – an appraiser can determine a reasonable share price or company valuation to base that on.
In practice, engaging a certified valuation analyst or business appraiser at the time of the ROBS setup is money well spent. They will analyze your financials, industry, and other factors to produce a report. This report becomes part of your ROBS file. If a CPA is helping with the transaction, they’ll love to see a valuation report because it guides how to record the entries. If the IRS audits, you can show the report as evidence you did your due diligence.
Furthermore, if your business grows, you might update the valuation periodically (say every year or two) to keep track of the plan’s asset value. This can also aid in planning any eventual sale or even in offering equity to new investors down the line; you’ll have an objective sense of what your company is worth.
In summary, while not an absolute legal requirement in black-and-white, obtaining a professional Business Valuation is considered a best practice for ROBS. It addresses both compliance and practical financial considerations. Our firm, Simply Business Valuation, has extensive experience performing these valuations for ROBS transactions, ensuring the numbers hold up to scrutiny and that you, your CPA, and the IRS can all be confident in the fairness of the stock purchase.
Q: Can I pay myself a salary from the business if I use ROBS?
A: Yes! In fact, you are expected to pay yourself a reasonable salary as an active employee of the business. ROBS requires that you work in the business (it’s designed for owner-operated companies, not passive investments). Since you’ll be an employee, you absolutely can draw a salary for the work you do – and it should be a “reasonable” compensation for your role. There is no restriction on this in the ROBS rules; paying yourself is part of normal operations. In reality, it’s beneficial: by paying yourself, you earn income that you can live on (you shouldn’t solely rely on the business’s growth for future gain; you need current income too). Also, when you pay yourself, you can defer part of that salary into your new 401(k) plan just like any worker would, which builds back up your retirement savings (). The IRS just doesn’t want you abusing salary as a way to siphon the rolled-over funds out improperly. “Reasonable” salary means an amount you would pay someone else to do your job with your skills and experience in that role. For example, if your company nets $100k in profit, you wouldn’t suddenly give yourself a $300k salary – that would look fishy. But giving yourself, say, $50k or $70k if that’s in line with industry norms is perfectly fine (every situation varies, just use common sense or ask your CPA). One advantage of salary: it’s tax-deductible to the corporation, reducing corporate tax, and it’s taxable to you as ordinary income (subject to payroll taxes as well). This is typically more tax-efficient than the corporation paying out profits as dividends (which would be taxable to the corp and then to you or the plan).
Most ROBS-guiding firms encourage owners to take a salary – after all, you need to eat and pay bills while running the business. Just be sure you’re actually performing work and the salary isn’t exorbitant relative to the business size. In the early stages, some owners keep their salary low to conserve cash (that’s okay too, as long as you can afford it personally). As the business grows, you can adjust your pay. There’s also no requirement to pay yourself immediately if the business can’t afford it – ROBS doesn’t mandate a salary, it simply permits it. You just can’t be completely passive; if you weren’t working in the business at all, that would violate the “active employee” rule. But assuming you’re working full-time in it, it would be quite odd not to draw any salary over the long term.
One more point: paying yourself via payroll means you’re paying into Social Security and Medicare, which is good for your future benefits. It’s part of running a real company with you as an employee. So yes, pay yourself a fair wage for your labor. It’s both allowed and advisable.
These FAQs cover some of the most common concerns business owners and their CPAs have about using ROBS for funding. If you have additional questions specific to your situation, it’s wise to consult with a ROBS specialist or a financial advisor who understands the nuances. Every business is unique, and regulations can change, so getting personalized advice will ensure you make the best decision.
Using a ROBS to fund an existing business can be a game-changer – it unlocks capital that you couldn’t otherwise touch without heavy costs, allowing you to invest in your company’s growth and potentially increase the value of both your business and your retirement portfolio. As we’ve discussed, yes, you can use ROBS for an existing business, but it requires transforming your business into a C-corp, adhering to strict compliance rules, and accepting the risk to your retirement funds. It’s not a decision to be taken lightly. You should weigh the benefits (debt-free financing, no immediate taxes, control over your investment) against the drawbacks (complexity, ongoing responsibilities, and risk of loss). Many successful businesses have been launched or expanded using ROBS, and many owners have realized their entrepreneurial dreams by leveraging their retirement savings. At the same time, some have seen their businesses fail and their retirement savings evaporate.
If you’re considering ROBS, here are a few parting pieces of advice:
Finally, don’t underestimate the value of a professional valuation throughout this process. As emphasized, Business Valuation is not just a formality; it’s a foundational element of a fair and compliant ROBS transaction. That’s where we come in.
Simply Business Valuation is here to help you navigate the financial complexities of ROBS. We bring expertise in valuing privately held businesses for ROBS setups, ensuring that your retirement plan’s investment is based on a credible, IRS-compliant valuation. Our team has worked with business owners and CPAs nationwide on valuations related to rollovers and business sales. We understand the intersection of tax regulations and valuation standards that ROBS transactions require. By having a solid valuation in hand, you protect yourself and set your business up for success with an appropriate capital structure from the start.
If you’re considering using ROBS for your existing business, or if you’ve already implemented a ROBS and need an updated valuation or compliance check, simplybusinessvaluation.com can provide the trustworthy, professional assistance you need. We pride ourselves on delivering thorough, defensible valuation reports that satisfy IRS scrutiny and give you actionable insights into your company’s worth. Beyond the numbers, we can consult with you and your advisors on best practices we’ve observed in ROBS-funded enterprises.
Call to Action: Ready to take the next step? Contact Simply Business Valuation for a consultation on your ROBS Business Valuation needs. Whether you’re in the planning stages of a ROBS, mid-transaction, or years down the road needing to evaluate your growth, our experts are equipped to guide you. We’ll work closely with your CPA or attorney to ensure all aspects align. Don’t navigate this complex process alone – leverage our expertise to safeguard your retirement investment and empower your business ambitions.
Investing in your own business through ROBS can be one of the most rewarding financial moves you’ll ever make – with the right guidance and careful execution, you can turn your retirement savings into a thriving enterprise. Simply Business Valuation is here to support you on that journey, helping you understand the value of what you’re building and securing your financial future. Get in touch with us today to learn more, and let’s make your business goals a reality with confidence and clarity.
