What Are the Requirements of Rollover Business Financing?

In your search for small business funding solutions, you’ve probably seen the acronym ROBS—Rollover for Business Startups—pop up more than once. It’s a popular solution for individuals with a significant retirement fund nest egg who want to use it for business financing without additional taxes or penalties.

However, rollover business financing does have some constraints regarding its use. What are those requirements? Learn what you can’t do with ROBS financing to help you make a more educated decision.

You Must Incorporate as a C Corp

In order for your rollover for business startups to work, you’ll need to structure your business as a C corporation with its own 401(k) program. This setup makes the rollover part of a ROBS work seamlessly, as your funds move from an old 401(k) into a new one.

The IRS will also require that you offer your employees the opportunity to buy into the business’s 401(k) program. Don’t let this mandate give you pause; offering retirement perks to your staff will also encourage high-quality employees to join and stay with your company.

Your Business Must Be Active and Federally Legal

Your business will not be eligible for a ROBS if:

  • It is not legal at the federal level (cannabis dispensaries are a common example)
  • It does not actively provide products or services
  • You are not an active employee of the company

ROBS funding won’t work for you if you want to be a passive or silent investor in the company. You’ll have to participate in your own business venture to qualify for rollover financing.

Business and Personal Expenses Must Stay Separate

If you fund your business with rollover financing, take care not to dip into business accounts for personal use. ROBS financing does inherently place you under greater scrutiny from the IRS; for this reason, keep meticulous financial records and don’t use ROBS funds for personal expenses.

Roth IRAs Are Not Eligible

While 401(k) retirement accounts are perhaps the most common source of ROBS funds, there are a few other account types that you can use. Traditional IRAs, 457(b)s, and 403(b)s are also eligible for rollover financing.

However, if your retirement funds are invested in a Roth IRA, you won’t be able to roll the money over into a new business account. Consult with a financial advisor about your financing options if you’re working with a Roth IRA.

If you want to use rollover business financing to secure capital for your new business, be aware of the requirements of this financial maneuver. You’ll need to abide by IRS stipulations when you use the money, and keep detailed records of your spending.

ROBS financing isn’t the best solution for every business owner, and that’s perfectly all right; Pango Financial’s funding solutions tool has other options for you to consider.