What is ROBS Funding and How Does it Work?

Rollovers as Business Start-Ups Use Retirement Savings to Start a Small Business

With ROBS, You Can Use Retirement Savings to Start a Small Business

Investing in a business is an important decision that requires careful consideration and strategic planning. The right guidance and a careful approach can help avoid risks while maximizing the potential benefits. For those considering entrepreneurship as part of their retirement portfolio, ROBS presents a compelling opportunity.

ROBS stands for Rollovers as Business Start-Ups. It’s a strategy that allows entrepreneurs to use their retirement funds, such as 401(k) or IRA accounts, to start or buy a business without incurring early withdrawal penalties or taxes. Essentially, the individual sets up a C-Corporation and then rolls over their retirement funds into a new retirement plan created by the corporation. This plan then purchases stock in the company, providing the capital needed to start or acquire the business. ROBS funding enables entrepreneurs to access their retirement savings to fund their ventures while avoiding traditional financing methods such as loans or investments.

Using ROBS to Fund a Franchise

With the accessibility of ROBS funding and the vast opportunities in franchising, it’s no surprise that franchising is booming. According to the IFA 2024 Franchising Economic Outlook report, over the next year, total franchise output is expected to rise by 4.1%, from $858.5 billion in 2023 to $893.9 billion in 2024.

Utilizing ROBS can offer a promising avenue for launching a franchise, particularly if you possess retirement funds awaiting allocation. This method allows you to use personal funds to kickstart your business, affording flexibility and autonomy often unmatched by alternative financing routes. Notably, ROBS presents an advantageous solution for individuals lacking a strong credit history, as it circumvents the need for credit assessments or collateral. Deciding on the suitability of ROBS as your financing mechanism hinges upon your specific circumstances and requirements.

Be Wise with Your Investment

By utilizing ROBS, individuals can leverage their retirement funds to kickstart their ventures, effectively aligning their business aspirations with their long-term financial goals.

Since a ROBS structure requires the retirement plan to invest in a C-Corp, seek to understand the advantages having a C-Corp offers to small businesses. Exploring the benefits of this structure can significantly impact financial outcomes.

Addressing concerns about the costs associated with retirement planning, it’s essential to recognize that not all providers are created equal. Look for a provider that stands out for competitive pricing and transparent fee structure.

Diversification within company-sponsored plans is paramount. Look for a plan that promotes diversification by allowing rollovers to be invested in both ER Securities and traditional retirement options. This ensures a balanced investment strategy and maximizes retirement planning benefits.

Be Honest with the IRS

Honesty with the IRS is essential. Retirement plans offer significant tax benefits for both employers and employees, but these benefits must be utilized responsibly. Compliance testing and accurate reporting are accountability measures, demonstrating a commitment to playing by the rules and ensuring the integrity of retirement investments.

Understanding the intricacies of retirement investing requires a comprehensive approach that balances opportunities with risks. By embracing wisdom, vigilance, and transparency, individuals can chart a course toward a secure financial future.

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Rocco Fiorentino is president and CEO of Benetrends Financial, the oldest and largest provider of financing and insurance for small businesses and franchise organizations. Benetrends is recognized as the innovator of the rollover for business (ROBS) start-ups and is one of the largest providers of SBA programs for start-up businesses. Reach him at rocco@benetrends.com or visit www.benetrends.com.
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