Business Funding FAQs
Explore answers to common questions about ROBS, SBA financing and other business funding options, the directEDUCATE process, and how Directed Equity can support you.
ROBS, or Rollovers as Business Startups, is a way to use eligible pre-tax retirement funds to invest in a business you plan to own and operate. In our directINVEST ROBS program, there are 4 steps:
- C corporation is established,
- The corporation sponsors a qualified retirement plan,
- Eligible pre-tax retirement funds are rolled into that plan, and
- The plan purchases stock in the corporation. The stock purchase is what provides capital to the business.
Directed Equity also helps prospects look at the broader funding picture. In some cases, ROBS may be used alongside SBA financing or another lending option to help meet the total funding need for the business.
No. ROBS is not a loan. There is no repayment schedule, interest rate, or monthly debt payment. The retirement plan purchases stock in the C corporation, so the funds become an equity investment in the business. If the business fails, there is no loan to repay, but the retirement funds invested in the business may lose value.
Yes. ROBS is a legal structure when properly established and maintained. It relies on government rules that allow a qualified retirement plan to invest in employer securities through a C corporation.
Eligible funds are pre-tax qualified funds that are eligible to rollover to a 401(k) plan. This can include retirement accounts such as a 401(k), traditional IRA, 403(b), governmental 457(b), TSP, SEP IRA, and SIMPLE IRA. Roth IRAs and Roth-only funds are not eligible for the stock purchase used in a ROBS structure.
No, Roth funds are not eligible for the ROBS stock purchase structure. Some employer plans may contain both pre-tax and Roth subaccounts, so the account details should be reviewed carefully. If your funds are Roth-only, ROBS may not be a fit, but a Directed Equity financing expert can help identify other financing solutions that may work for you.
Generally, funds in a current employer plan cannot be rolled over while you are still actively employed with that employer. However, some plans may allow an in-service distribution, and former employer funds or IRA funds may be available separately. This should be confirmed with your company’s HR department.
There is no statutory IRS minimum for ROBS, but there are practical funding and cost considerations. The amount needed depends on the total business funding requirement, the amount of eligible retirement funds available, and whether ROBS would be used by itself or together with SBA financing or another lending option.
If your retirement funds may not be enough to fully fund the business, a Directed Equity financing expert can review the broader funding picture and discuss whether ROBS, lending, or a combination may be worth exploring.
No. Many business owners use only a portion of their eligible retirement funds for the ROBS stock purchase. The right amount depends on the business cost, available retirement funds, desired retirement cushion, and whether additional funding may be needed.
If ROBS would only cover part of the total funding need, a Directed Equity financing expert can review whether SBA financing or another lending option may be used alongside the ROBS program.
Possibly. In some situations, a spouse’s eligible pre-tax retirement funds may be part of the funding conversation, but this depends on the account type, employment status, business ownership structure, and plan requirements.
If spouse funds are not available or are not enough to meet the full funding need, Directed Equity may also be able to review whether SBA financing or another lending option should be considered.
Yes. Multiple eligible pre-tax retirement accounts may be combined, depending on the account types and rollover availability. If the combined eligible funds do not cover the full business funding need, a Directed Equity financing expert can also review whether SBA financing or another lending option may be part of the funding strategy.
A C corporation is required because the ROBS structure depends on a qualified retirement plan trust purchasing employer securities (corporate stock). LLCs, S corporations, partnerships, and sole proprietorships do not issue the type of stock required for this structure. This is a structural requirement of the ROBS arrangement, not simply a Directed Equity preference.
Not directly. A ROBS-funded structure requires a C corporation because the retirement plan trust purchases corporate stock. Some business structures may involve additional entities or future changes after the ROBS arrangement has been fully executed and entity restructuring is allowed, or as the ROBS arrangement is fully unwound, but those details require careful review before any decisions are made.
Generally not, while the ROBS plan still holds company stock. Converting to S corporation status while the retirement plan owns C corporation stock can create serious compliance and tax issues. A proper ROBS restructuring, exit, or stock buyback process should be reviewed before any entity change is made.
For ROBS, the C corporation structure is required because the retirement plan must be able to purchase employer securities, or company stock. Many ROBS-funded businesses manage the C corporation tax structure through normal business planning, including reasonable W-2 compensation, reinvesting profits into the business, debt repayment, and growth expenses. When appropriate, a Directed Equity professional can provide consultation regarding restructuring options.
Directed Equity can explain how the C corporation structure works within the directINVEST ROBS program. Clients should also work with a CPA who understands C corporation taxation to review the tax impact and business-specific planning options.
Yes. ROBS is often used alongside SBA financing or other lending options. In many cases, the ROBS funds may help provide the equity injection or owner contribution needed for a larger business purchase, while the loan helps cover the remaining funding need.
Directed Equity looks at the full funding picture, including the business cost, available retirement funds, timing, and whether ROBS, SBA financing, another loan option, or a combination may make sense. A Directed Equity financing expert can walk through those options with you.
Yes. ROBS may be used for many franchise funding situations, including starting a new franchise location, buying an existing franchise resale, expanding into additional locations, or acquiring multiple units, as long as the structure and use of funds meet the program requirements.
Because franchise purchases can require more capital than the ROBS rollover alone, Directed Equity can help review whether the directINVEST ROBS program may be used by itself or combined with SBA financing or another lending option to help meet the total funding need.
Yes. Despite the name, ROBS can be used for more than startups. It may be used to help purchase an existing business, fund a franchise resale, or support certain expansion needs, as long as the structure and funding use meet the program requirements.
For acquisitions, ROBS may be only one part of the funding strategy. A Directed Equity financing expert can review whether ROBS, SBA financing, another lending option, or a combination may make sense based on the purchase price and available funds.
The key is that the business must be an active operating business that meets the structure and funding requirements of the ROBS program. For example, restaurants, retail stores, fitness studios, childcare or education-related businesses, automotive services, home service businesses, insurance agencies, professional services, and other qualifying business opportunities. Passive investments, personal expenses, or businesses involving self-dealing or prohibited transactions are not appropriate.
If the business fails, the portion of retirement funds invested in the company stock may lose value or become worthless. Because ROBS is not a loan, there is no repayment obligation to the retirement plan. However, the business and retirement plan still need to be unwound properly, and other financing such as SBA loans may create separate obligations. Alternatively, you also have the option to start a new active trade or business under the C corporation.
ROBS itself is an equity investment structure, not a personal loan. That means the ROBS structure does not create a repayment obligation the way a loan would. However, the retirement funds invested in the business are at risk if the business fails.
If ROBS is combined with SBA financing or another loan, that loan may have separate requirements, including possible personal guarantees or collateral obligations. Those lending terms should be reviewed directly with the lender and appropriate advisors.
The owner must be a bona fide W-2 employee of the C corporation. This is part of what allows the owner to be eligible to participate in the retirement plan and complete the initial rollover contribution. One way to establish this is to work at least 501 hours annually and receive at least minimum wage (or other reasonable pay) for the work performed. The amount of pay received from the ROBS corporation should be commensurate with the services provided.
No. In a ROBS structure, the owner must be treated as a W-2 employee of the C corporation. This is part of what allows the owner to be eligible to participate in the retirement plan and complete the initial rollover contribution.
After the directINVEST ROBS structure is set up, there are ongoing responsibilities for both the C corporation and the retirement plan. These may include maintaining the C corporation, working with a CPA on annual corporate tax filings, ensuring that the plan is made available to eligible employees, filing annual retirement plan reports such as Form 5500, tracking employee eligibility, providing required plan notices, maintaining plan document compliance, supporting employer stock valuation reporting, and keeping proper documentation of plan and corporate transactions.
Directed Equity provides ongoing services to support the ROBS-specific plan administration process, incuding the annual Form 5500 preparation and plan document compliance.
Form 5500 is an annual retirement plan information return filed with the Department of Labor and IRS. ROBS plans require annual Form 5500 reporting because the 401(k) plan holds employer securities and is not eligible to file on the Form 5500-SF or Form 5500-EZ. This is a key ongoing compliance obligation.
Directed Equity helps clients with Form 5500 preparation through its ongoing service options.
In general, no. Your CPA plays an important role, especially with the C corporation’s tax filings, bookkeeping, payroll coordination, and tax questions. Because a ROBS arrangement requires a C corporation, it is especially important to work with a CPA who understands C corporation taxation and is comfortable advising a business operating under that structure.
However, ongoing ROBS requirements also include retirement plan compliance, which is separate from standard corporate tax work. Directed Equity supports clients with ROBS-specific plan administration items such as Form 5500 preparation, plan document compliance, employee eligibility, required notices, plan testing, and employer securities reporting.
In most cases, the CPA and Directed Equity work in complementary roles: the CPA supports the C corporation tax and accounting side, while Directed Equity supports the retirement plan compliance side of the directINVEST ROBS program.
Yes. With a ROBS structure, the business has a retirement plan, and that plan needs to be offered to eligible employees once they meet the plan requirements. The employer should maintain documentation of the offer, enrollment, or declination. As part of the directINVEST ROBS program, Directed Equity helps provide plan-related paperwork and notice materials for eligible employees.
No, employees are not automatically given ownership in the business. However, eligible employees must be offered the same investment options, including the option to invest in qualified employer securities. If an employee were permitted to invest in employer securities, they would be using their own plan account to make that investment. In practice, this is uncommon because private company stock can involve significant risk and limited liquidity. There may also be special limitations on when and how employees may invest, depending on the plan language and compliance requirements.
When you use a ROBS structure, the business establishes a qualified retirement plan, which is a benefit that must be offered to eligible employees once they meet the plan’s eligibility requirements. Hiring employees can create additional responsibilities, including tracking eligibility, providing required notices, allowing participation, maintaining documentation, and completing required testing or filings.
As part of the directINVEST ROBS program, Directed Equity helps support this process by providing clients with the plan-related paperwork and notice materials needed for eligible employees.
The second 401(k) problem occurs when a ROBS-funded business later sets up a new, separate 401(k) plan for employees instead of properly using the existing ROBS-sponsored plan. This can create testing, documentation, fee, and compliance issues that could affect the existing ROBS plan and can be expensive to fix.
When a ROBS-funded business is sold, the retirement plan must receive its proportional share of the value for the stock it owns. Those funds generally remain within the retirement plan until they are rolled over, reinvested, or distributed according to applicable retirement plan rules. The exit process should be reviewed before any sale or ownership change ideally at least one year before you plan to sell or close the business.
There are many tax-advantaged exit strategies available for ROBS plans. Common exit paths may include a stock buyback, Roth election, a sale of the business, or a formal plan/business dissolution, and Net Unrealized Appreciation (NUA). The right path depends on the business value, plan ownership, corporate structure, and timing.
When considering a stock buyback, it’s also important to understand that qualified retirement plans are generally expected to be established with permanency in mind, so the ROBS 401(k) plan should not be treated as something that is automatically terminated as soon as the initial funding transaction is complete. In many cases, the plan can continue to serve as the company’s retirement plan after the ROBS stock is bought back.
Directed Equity can help review exit options, plan continuation, and timing considerations. Ideally, this review should begin at least one year before a planned sale, ownership change, or business closure.
Generally, no. The retirement plan should not be viewed as something that is set up only to complete the initial ROBS funding transaction and then immediately terminated. Qualified retirement plans are expected to be established with permanency in mind.
After the ROBS funding is complete, the plan continues to serve as the company’s retirement plan and remain available for eligible employees. In some cases, the plan may also help satisfy state-mandated retirement plan requirements, depending on the plan design and state rules.
There may be situations where terminating the plan is appropriate, such as a business sale, business closure, or other exit event. However, the timing and process should be reviewed carefully before taking action. Directed Equity can help clients evaluate whether plan continuation, stock buyback, or formal plan termination is the appropriate path.
Generally, yes. Since the directINVEST ROBS structure includes a qualified retirement plan sponsored by the C corporation, the 401(k) plan satisfies state-mandated retirement plan requirements, depending on the state rules, plan design, employee eligibility, and how the plan is operated.
State requirements vary, so this should be reviewed before assuming the ROBS plan satisfies a specific state mandate. Directed Equity can help clients understand how the existing plan may fit into those requirements.
Directed Equity specializes in ROBS 401(k) plans and small business funding solutions, with more than 20 years of experience helping entrepreneurs start, buy, or grow a business.
Our approach is focused on education, relationship-driven support, and ongoing guidance throughout the full lifecycle of the ROBS arrangement. We work with clients as they enter the structure, operate their business, and eventually exit or wind down the arrangement when the time comes.
Because ROBS involves a qualified retirement plan, C-corporation structure, annual reporting, employee eligibility rules, corporate tax considerations, and business funding strategy, it is important to work with a provider that understands how these pieces fit together. Directed Equity’s team brings experience across retirement plan compliance, corporate tax considerations, small business funding, and franchise systems, helping clients understand both the structure and the ongoing responsibilities.
Directed Equity also works alongside the client’s CPA, attorney, financial advisor, or other professionals when tax, legal, or investment advice is needed.
Directed Equity looks at the broader funding picture as well. ROBS may be one part of the solution, but some business owners may also need SBA financing or another lending option to meet the total funding need.
If you are comparing providers, a Directed Equity financing expert can walk through our directINVEST ROBS program, our service model, and whether a ROBS, lending, or combined funding path may be a fit for your situation.
No. Directed Equity does not require a monthly administration fee.
The directINVEST ROBS setup fee includes forming the C corporation, establishing the retirement plan, supporting the rollover process, documenting the stock purchase, and helping coordinate the funding steps. Specific pricing and included services should be confirmed with a Directed Equity financing expert.
If the business also needs SBA financing or another lending option, the financing expert can explain how the ROBS setup process may coordinate with the broader funding timeline.
Setup fees should not be paid from rollover funds or retirement plan assets. Those funds are plan assets and should be used only for permitted plan purposes, such as the plan’s investment in qualifying employer securities after the ROBS structure is properly established.
Using plan assets to pay setup costs could create prohibited transaction concerns because it may be viewed as using retirement funds for the benefit of the business owner, the corporation, or the provider rather than for the retirement plan.
Before the call, it helps to know your business idea or franchise, estimated total funding need or purchase price, timeline, retirement account type, approximate account balance, and whether you are also considering SBA financing or another loan. Exact numbers are not required. Ranges are fine.
If you already have a franchise consultant, lender, CPA, attorney, financial advisor, spouse, or business partner involved, you are welcome to invite them to the session.
ROBS and self-directed IRAs are different structures. ROBS is designed for active business ownership through a C corporation and retirement plan stock purchase. A self-directed IRA is generally a passive investment vehicle and has strict prohibited transaction rules that prevent active management and compensation.
UBIT stands for Unrelated Business Income Tax. In a properly structured ROBS arrangement, the retirement plan owns stock in a C corporation rather than directly earning operating business income, which generally helps avoid UBIT at the plan level. This is a technical tax area, so specific questions should be reviewed with a tax advisor and a Directed Equity financing expert.
Eligible employees will need to receive required retirement plan notices and plan information, such as enrollment materials and a summary of plan terms. The exact notices depend on the plan design and employee eligibility.
As part of the directINVEST ROBS program, Directed Equity will provide a complete review of the notices that will be required to be provided as part of the ongoing plan administration responsibilities.
Top-heavy rules are retirement plan rules that may apply when most of the plan assets belong to owners or key employees. In some situations, these rules may require the company to make employer contributions for non-key employees.
This usually becomes relevant when the business has eligible employees or is considering discretionary employer contributions. Directed Equity helps determine whether top-heavy testing applies and completes the required testing as part of the applicable ongoing plan administration support.
The owner generally needs to be a bona fide W-2 employee and receive reasonable compensation. This is part of what allows the owner to be eligible to participate in the retirement plan and complete the initial rollover contribution. Timing and amount depend on business facts, cash flow, role, and tax and payroll guidance.
Yes, this is possible. If you have a family member or unrelated business partner that wants to invest in the corporation, discuss this with a Directed Equity financing expert to explore how this can be structured to meet your financing goals and keep the corporation and retirement plan in compliance.
Yes, if done properly. Stock ownership changes require an independent, third-party valuation. New owners or investors generally need to contribute fair market value for ownership interests, and the existing retirement plan’s stock position must not be improperly diluted. These transactions should be reviewed before any ownership change occurs.
Yes, additional retirement-plan investment into the existing C corporation is possible. It requires an independent, third-party valuation and proper documentation. Our Directed Equity team can assist with these types of transactions.
A 401(k) participant loan is a loan from a retirement plan that must be repaid under specific limits and terms. ROBS is different. It is an equity investment by the retirement plan into a C corporation, with no loan repayment schedule.
Depending on the amount needed and the available retirement funds, a Directed Equity financing expert can help review whether ROBS, a 401(k) loan, SBA financing, another loan option, or another path may be worth discussing.
Participant loans are subject to specific plan and IRS rules, including limits, repayment terms, and default consequences. This is not the same as ROBS funding.
Because a ROBS plan holds private company stock, the value of the employer securities must be supported for certain reporting, administration, and transaction purposes. A formal independent, third-party business valuation is required when there are substantial business events, such as: stock transactions, redemptions, additional stock purchases, ownership changes, business sale activity, or other events that affect the value of the company stock.
Depending on the plan language and circumstances, an annual independent business valuation may not be required solely for the annual Form 5500 reporting purposes. Directed Equity works with clients to help them understand acceptable valuation methodologies for employer securities and when additional valuation support may be needed.
A Directed Equity financing expert can walk through how valuation support works under the directINVEST ROBS program.
An ERISA fidelity bond protects the retirement plan from certain losses caused by fraud or dishonesty by people who handle plan funds. The Department of Labor requires that the bond coverage cover at least 10% of the retirement plan’s assets at the beginning of the plan year.
Profits earned by the business belong to the C corporation and may be used for normal business purposes, such as operating expenses, payroll, growth, debt repayment, or other business needs.
Since a ROBS-funded business is structured as a C corporation, the company may also have the ability to issue dividends to shareholders if the corporation chooses to do so. If dividends are paid, they must be paid proportionally to all shareholders — with a ROBS plan, this includes the retirement plan.
This can be one benefit of the C corporation structure. When the retirement plan receives its share of dividends, those funds go back into the retirement plan rather than to the business owner personally.
Directed Equity can help clients understand how profits, dividends, and shareholder activity fit within the directINVEST ROBS structure. Consult your CPA or tax advisor to review the tax impact of any dividend strategy.
ROBS needs to be used for an active operating business, not a passive real estate investment. Real estate-related businesses that may be appropriate include property management, real estate brokerage, home inspection, appraisal services, construction or remodeling, maintenance services, staging, real estate photography, short-term rental management, or other service-based businesses tied to real estate.
Passive ownership of rental property, holding land for appreciation, or investing in real estate without active business operations may not be a good fit. Since real estate-related business models can vary, a Directed Equity financing expert can help review the specific structure to see if ROBS financing would be a good fit or if other financing solutions would be more suitable.
Ready to Move Forward?
Schedule a consultation to discuss your business financing goals.
or Call (303) 800-4934