The world of online business continues to grow, making plenty of opportunity for those with the right drive to achieve success and build a successful business. Unfortunately, it takes more than just passion and vision to start an online business; it also takes capital.
Although many online businesses are very profitable, obtaining financing to start one can be a challenge as financial institutions and investors often view them as risky endeavors due to the fact that they usually do not involve the type of tangible assets that can be used as collateral. That doesn’t mean that it’s not possible to get the funds to start an online business. Many would-be entrepreneurs have a source of capital available in an unlikely place–they’re retirement accounts. If you currently have a retirement account that you started while working for someone else, you may be able to use the funds that it contains to finance your online business and get it off the ground, so that you can start to work for yourself.
What Is an ROBS?
The process of taking funds out of a retirement account to obtain funds to start a business is known as a Rollover for Business Start-Up or ROBS for short. While this is the technical name for the process, many people simply refer to it as a 401(k) rollover for business. With a ROBS, you invest your own retirement money in your new small business as if you were investing in stock from a company. An ROBS provides easy access to funds, but it does involve risk, as if your company is not ultimately successful, you could lose your retirement. As a result, most experts recommend using an ROBS only when other methods of obtaining funds like bank loans, credit cards, Small Business Administration loans and investments from friends and family are unavailable.
How an ROBS Works
The steps for setting up an ROBS are rather straightforward. Here’s what happens:
1. You establish a new corporation for your online business.
2. Your new business sets up a 401(k) retirement plan.
3. You roll the funds from your current employer’s 401K fund into the business’ 401k fund.
4. Your 401(k) buys stock in your company. You can then use the proceeds from the stock sale to invest in your business.
While the process is rather simple, you typically shouldn’t complete a ROBS on your own. An experienced ROBS provider should be employed to assist you with the process and ensure that every step is done correctly.
Tax Implications of an ROBS
Using retirement funds to start a business may sound too good to be true, but it is allowed under the terms of the Employee Retirement Income Security Act of 1974 or ERISA. Under the law, you are permitted to make a rollover from one 401(k) to another without paying any type of tax penalty, provided that the rollover is structured in a certain way and performed within a set period of time. An experienced ROBS provider will be able to complete the transaction correctly, so that you are not assessed fees, fines or penalties.
Benefits of an ROBS
There are a number of reasons why an ROBS is a popular method for funding online businesses, including:
- No Cost. When done correctly, there are no fees or costs associated with a ROBS. This is different than simply cashing out your 401K and using the funds for your business, which usually will cost you tax penalties.
- No Finance Charges or Interest. When you fund your online business with an ROBS, your business won’t be saddled with debt when you’re first starting out. For many online businesses, this is highly beneficial and can mean that there are few operating costs early on.
- Fast Access to Funds. Once you have found an ROBS provider to assist with the process, everything can be completed quickly. This differs from loan processes, which can often take weeks to complete.
- Flexibility. An ROBS doesn’t have to be your sole source of funds for starting your business. You can easily combine it with other methods of financing.
Before you can determine whether or not an ROBS is the right way to fund your online business, you first need to know exactly what type of business you intend to start or buy and what the costs will be. Purchasing an existing online business is an easy way to enter the market, and an online business broker can tell you more about what’s currently available for purchase. Contact us to speak to one today.