How to use a 401(k) to Fund Your Startup or Franchise

If you are planning to raise money for a new business through equity or debt financing, you may be aware of the tradeoffs. Equity financing dilutes your share of the business, meaning that you keep less of the future business’ income. Debt financing can saddle your new organization with monthly payments you need to make whether or not the venture is successful. Thankfully, if you have an active 401(k), there is a third way to finance called ROBS where you get to keep your future revenue and don’t have to pay anything back to anyone.

GWP Waterman is a business funding adviser based in Miami, Florida. We do not fund directly; we connect businesses with the right funding sources. This article is for informational purposes only and does not constitute financial or legal advice.

GWP Waterman facilitates introductions to premium ROBS (Rollovers for Business Start-ups) providers. Also referred to as 401(k) business financing, these programs are neither loans nor early distributions of your 401(k).

In simple terms, a ROBS allows you to use your existing retirement savings (including a 401(k) from a past employer or a Traditional IRA) to start or buy a business without paying early withdrawal penalties or upfront taxes. Instead of borrowing money from a lender, you are essentially using your own retirement funds as an “angel investor” in your own business.

How ROBS Transactions Work

Here is the exact five-step process of how a ROBS transaction works through the providers we work with:

1. Form a New C Corporation
   To legally facilitate this process, your new business must be structured as a C Corporation. A C Corp is the only business entity type that allows a private retirement plan to purchase its stock. (Our partner’s onboarding team handles the setup and legal filing of this entity).
   
2. Establish a New 401(k) Plan
   Once the C Corporation is created, it establishes a new corporate 401(k) retirement plan for its employees (including you).
   
3. Roll Over Your Retirement Funds
   You then request a “rollover” of your existing eligible retirement funds (e.g., from an old 401(k), 403(b), or IRA) into the new C Corporation’s 401(k) plan. Because this is a direct retirement-to-retirement account transfer, it is not considered a distribution, meaning it triggers zero taxes and zero early withdrawal penalties.
   
4. Buy Company Stock
   Your new 401(k) plan uses the rolled-over funds to purchase stock in your newly formed C Corporation. Now, your retirement plan essentially owns equity in your new business.
   
5. Fund Your Business
   The C Corporation now holds the cash from the stock sale in its corporate bank account. You can use these funds immediately for legitimate business expenses, such as buying an existing business or franchise, buying equipment, paying for marketing, or covering payroll and working capital.

“Instead of borrowing money from a lender, you are essentially using your own retirement funds as an ‘angel investor’ in your own business.”

Key Requirements & Advantages of ROBS

Debt-Free & Cash Rich: Because it is your own money, there are no monthly loan payments, no interest rates, and no need to put up your house as collateral.

No Credit Check Required: Your credit score does not matter for a ROBS because you are not taking out a loan.

Funding Minimums: While there is no legal minimum, it is generally recommended that you have at least $50,000 in rollable retirement funds for the ROBS structure to make financial sense (due to setup and administrative fees).

You Must Be an Employee: To stay compliant with the IRS, you must be a bona fide employee of the new business, meaning you will work for the company and take a reasonable W-2 salary once the business is generating revenue. It cannot just be a passive investment.

Ongoing Compliance: Because your business’s 401(k) plan owns shares in the company, there are strict IRS and Department of Labor regulations you must follow annually. There is an ongoing monthly fee to administer the plan and keep your business compliant with these federal agencies.

Can be Combined with other Funding Options: A ROBS can also be combined with an SBA loan (for example, using your rolled-over 401(k) funds as the required 20% down payment on a larger bank loan).

Getting Started

Whether you are acquiring an existing enterprise, funding a franchise, or launching a new venture, ROBS financing offers a powerful, debt-free runway.

That said, it is important to consider broader options with your overall capital strategy in mind. At GWP Waterman, we work to evaluate your funding options, stress-test your financials, and determine whether 401(k) business financing, traditional debt, or a hybrid capital structure delivers the best terms for your business.

Reach out to GWP Waterman today to map out the optimal funding path for your growth.