Glossary
ROBS (Rollover for Business Startups)
A structure that lets you fund a business with retirement savings without an early withdrawal penalty, by having a new C-corporation's retirement plan buy stock in the corporation. Legal, genuinely useful, and carrying risks that marketing rarely states.
ROBS (Rollover for Business Startups): A structure that lets you fund a business with retirement savings without an early withdrawal penalty, by having a new C-corporation's retirement plan buy stock in the corporation. Legal, genuinely useful, and carrying risks that marketing rarely states.
What it actually is
Simplified: you form a C-corporation, the corporation establishes a retirement plan, you roll your existing retirement funds into that plan, and the plan buys stock in the corporation. The corporation now has cash to operate with, and your retirement plan owns shares in it.
The result is funding without a loan, without interest, and without the early withdrawal tax and penalty you would face taking the money out directly.
Why people use it
- No debt and no payments, which is decisive for a startup with no cash flow to service a loan.
- No personal guarantee on the funding itself.
- It can supply the equity injection for an SBA loan, making a combined structure possible.
- Speed, relative to any underwritten financing.
The risks, stated plainly
- Strict ongoing compliance. Annual valuations, plan filings, and rules about how the corporation and the plan interact. Getting it wrong can disqualify the plan, which makes the whole rollover a taxable distribution with penalties.
- C-corporation required, with its own tax treatment and administrative burden — and that choice is hard to unwind later.
- The plan must be genuinely available to eligible employees, which has real consequences once you hire.
- Prohibited transaction rules govern what you may pay yourself and how you deal with the corporation.
- Setup and annual administration cost real money, and the ongoing fee continues for as long as the structure exists.
If you are considering it
- Take advice from a professional who is not the firm selling you the structure.
- Ask what percentage of your total retirement savings this represents. If it is most of it, think very hard.
- Price the annual administration, not just the setup.
- Ask what unwinding it costs, and how, before you commit.
- Compare honestly against startup financing with a smaller amount at risk.