Here's where you can find money to start a business
You want to start or buy a business.
Only….
You don’t have any money.
Or at least you don’t think you do.
If you have money from a 401(k) and you’ve left that employer, then you do have money!! You can move those funds into a program called the Rollover For Business Startups and invest in a business. The best part?
You can draw a salary from your business -- NOW. Not 20 years from now, not after you retire…. You get to use your pre-tax funds, invest in a business and make an income from this today.
Until I started this podcast and spoke with Kenny Rose on Episode #7, I had no idea this program existed. As soon as I understood how it worked, I was immediately frustrated that no one had told me about ROBS earlier. The reason is that back in 2015, Mike and I had been talking with an experienced hotel investor and we were very interested in doing a project in this niche. I called my CPA and shared our plans to use my IRA funds and he….. Freaked out. He asked us to come into his office and proceeded to tell us that the tax implications would be too high. He highly advised against doing this hotel project with IRA funds.
Fast forward to 2019 when I learned of this program and I started investigating to learn more…. And I realized…. This program would have worked for us back then! It’s really frustrating not to have all of the information at the time you need it. Thus, I want to share with you the ROBS 401(k) in case you ever need this type of program.
How does the Rollover For Business Startups Work?
This program is a funding platform that allows people to use pre tax retirement money for the purchase or startup of their own business without tax or penalty. So really, the program is more of a solution to taking a distribution from our Retirement Account, right? If you're looking to access money in an IRA or 401k, and you want to use that money to start your own business, as opposed to taking a distribution and paying a 10% early withdrawal penalty, and then state and federal income taxes on that distribution, basically, this program gives people the ability to use those pre tax dollars to start their own business.
You may be wondering… is this really legal?
Yes, it is.
The program has been around now for about 37 years. This is a program that has been audited numerous times over the last nearly four decades. The company I spoke with, Benetrends been setting the program up since 1982.
It's so interesting that in the United States, we have such an opportunity to work through taxes and there's a lot of different options available, and Benetrends is fully compliant within the law to find the best way to optimize our taxes or to optimize programs.
You may be thinking -- is this the same as a Self-Directed IRA?
Nope. Although the self directed IRA is the funding program that is most often confused with ROBS. But the two different programs have entirely different uses. your self directed IRAs are really designed for passive real estate investing. Or if you were looking to be an angel investor in a company and make some type of minority passive investment into somebody else's business, that is exactly what the self directed IRA was designed to be for people.
With ROBS, this program is somebody who wants to start their own business using their retirement funds, and they want to have a direct involvement in that business. That is exactly the type of candidate that would be best suited to utilize the ROBS program.
Now, if you are curious about the background on Benetrends, note that the founder of the company is the person who developed this whole program.
The founder figured out how to bring the pieces together and give people access to their own retirement assets. The first plan was set up in 1982 and 37 years later, this structure continues to be a viable model. You will see this program used in the franchise space. People use the program to start their own business. And others use this program to acquire existing businesses. Benetrends even encounters people who will use this program to recapitalize an existing business. So there's a number of different uses for the program but it's most common is within the franchising and startup space.
What qualifies?
First, in order for you to access your retirement funds, the money has to be in some type of IRA, or it could be really any type of qualified account, so long as it comes from a prior employer. If Benetrends were to try to roll somebody's retirement money out of our current employers plan, most plans have language that do not allow people to roll out that retirement money until they've officially terminated employment.
In terms of the program itself, you can simplify into four steps. Each step is independent of the others and these are all very common components that take place. But once you tie them all together, what you end up with is kind of this ingenious way of using pre tax money to fund your own business, as opposed to using it to fund somebody else's. That's essentially the money is doing when you have invested in an IRA or 401k.
The first step is to create some type of entity for somebody to operate their business out of. And for the purpose of our transaction, the type of entity that Benetrends would establish for the business would be a C Corp. Benetrends then files the clients’ articles of incorporation with the Secretary of State where they plan on operating the business. This will serve to establish that brand new Corporation.
Once the corporation has been established, the second step is to design a brand new qualified retirement plan for the business and this is not a cookie cutter retirement plan document. There's some customization here. So Benetrends designs a defined contribution plan and some type of 401k plan for the client’s business.
The next step is to rollover the funds from the IRA into that new qualified plan. And because it is a rollover and not a distribution, there's no taxable event, or just moving money from one qualified plan to another.
Once those funds have been rolled into the new qualified plan, the last piece clients is to invest that money. But instead of investing in back into a mutual fund for some type of index bond or instead of investing in Apple, Google, Netflix, Amazon, Facebook whoever it might be, what you would do is purchase the stock of your own privately held C Corp.
Once you make the investment into your own privately held Corporation, the money is wired from your retirement account straight into that C corporation’s business account. And once the funds hit that business account, that cord between retirement plan assets and corporate assets is severed. This money now becomes operating capital for your business.
You have full access to the funds, and the money can be used to cover any standard business expense. If it's a franchise, that will include things like your franchise fees. It includes the purchase of equipment, inventory, marketing, leasehold improvements, and it also includes payroll, so you can pay your employees with these funds.
But keep in mind, you must be an employee of your own Corporation. Which then means that you have the ability to draw your own salary from the corporation from day one. So for anyone that is giving up a job in corporate America or giving up your income stream, having the ability to draw that income from your own corporation is paramount to provide living expenses.
The major factor of the program is that because of the way it is set up, it provides a direct income stream for our clients. And that's the biggest difference between the ROBS program and a self-directed IRA.
Self-directed IRA really lends itself toward passive investment. If you're wanting to be actively engaged, running a business day to day, at that point, ROBS makes a lot more sense
What if you don’t have all the money in your IRA to buy or start a business?
if you don't have all of the funding that you need for your business in an IRA or in some type of 401k, you can use this program as a means to make your cash injection and then use these retirement funds to leverage additional financing through a program like a Small Business Loan.
A Small Business Loan (SBA) is your government Guaranteed Loan Program that's specifically designed for business startups. When it comes to business financing, every lender and every bank is going to require some amount of skin in the game.
Normally banks are requiring anywhere from 10 to 30% down in order for you to qualify for financing of anywhere between 70 and 90%. You can use the Rob's program to come up with that cash injection and basically use this as a means to then leverage government guaranteed funding through the SBA 7 (a).
Another key benefit of this program is that by using retirement funds as opposed to cash, you're actually holding on to the money that you've already paid taxes on as your post closing liquidity
How long does all of this take to set up?
For Benetrends, the standard timeline is somewhere between 20 and 30 days. There’s an in-house team that will facilitate the entire setup of the program. The company focuses on guiding clients through what makes the most sense in setting this program up for them. They advise on where to incorporate and what type of retirement plan might make the most sense for your business. And once you’ve established a plan, Benetrends will actually facilitate the entire setup of the program in house.
What about on-going support?
Benetrends also helps clients to utilize the program on an ongoing basis. The service includes a full record keeping service on behalf of the retirement plans. This includes all the necessary tax filings pertaining to the retirement plan each year. Examples include compliance testing and annual fair market valuation that is provided the IRS with each year. So the annual fair market analysis works when you decide to hire employees. This includes all of the eligibility testing for those employees and if needed, Benetrends could set the employees up on vesting schedules.
Benetrends shared that they become kind of part of your team as you enter into business and or franchise ownership. You're working not just by yourself, typically, you're working with an attorney, right? You're working with an accountant, you may be working with a funding provider, the Benetrends simply becomes part of that larger team. That helps people basically excel in business ownership.
One of the questions Benetrends gets a lot is, if they have a relationship with an accounting firm who has a really solid grasp on the ROBS program. The answer is yes.
What are some of the cons of this program?
The biggest con is that you are risking your retirement funds that you're investing into your business. Whenever you're starting your own business or whether you're purchasing a business, there's always going to be some inherent risk. It doesn't matter how you're funding it, you're always going to need to have some skin in the game. So if you're using cash, essentially, the cash that you are investing into the business is your risk. If you're using retirement funds, this is your risk as well. But your risk is reduced with ROBS in that this is actually the cheapest way to fail… why? Because you are using pre tax retirement money.
This then means that the government assumes about 30 to 35% of the risk in the business by using the pre tax dollars, as opposed to the post tax dollar and if the business were to fail, the way that this investment is treated is like any other poor investment within a qualified plan.
If you have money in your IRA or in your 401k invested in a publicly traded company that goes out of business, you simply lose out on the money that you had invested in that company stock. If the business were to fail, and you just purely use the ROBS programs to fund the business, that investment is treated the same way. There's no additional taxation is just treated as a poor investment within a qualified plan.
Benetrends shared that most of the clients that they are working with are not pouring every single dollar of their retirement funds into this business. For example, many folks look at purchasing a franchise system and instead of leaving all of their IRA funds invested in the market, they look at the ROBS program as a way to diversify how you are spending that retirement money instead of leaving it all invested in stocks, bonds, mutual funds and index funds. Many people look at using the program as more of a diversification tool than anything else.
Now if you're wondering whether or not people have funded their business with their retirement funds and have been successful, Benetrends has created a number of videos with their clients all over the country. Some of them are franchisees. Some of them are small time business owners, talking a little bit about their stories.
What kind of resources can you find on the Benetrends site?
There’s a number of different case studies on the website at https://www.benetrends.com. There are guides that talk about all of the different funding programs available to somebody who's buying or starting a business. The site covers things like securities back lines of credit. It covers SBA financing, for those that are interested in multiple business or multi unit franchise financing. There's multi unit strategies in that funding guide. There are also guides around home equity lines of credit as those are certainly areas that people should consider when looking to start their own business or purchase their own business. So if you're wondering whether or not people have funded their business with their retirement funds and have been successful, Benetrends has created a number of videos with clients all over the country. Some of them are franchisees. Some of them are small time business owners and all of the videos share more about their stories.
Benetrends also has an E-Book on the ROBS program, which is a comprehensive piece of literature out there with regards to roll over funds. Right. Whether you're looking into a small business loan, whether you're looking into rollover funding or whether you're looking into something else, Benetrends has plenty of resources on the website - even outside of funding.
And even after you get the doors open on your business, Benetrends has partners that will handle business insurance. If you wanted to run your health care costs through the business, Benetrends can help you with health insurance. And they even have groups that provide HR and payroll services, and areas like credit card processing. So no matter what it is that you're looking for, in starting your new business, you've got access to a number of different resources through Benetrends.
Check out the full interview with Storm Miller from Benetrends here.