What Is a ROBS and Can It Be Used for an SBA Loan Down Payment?

If you’re exploring ways to fund a business acquisition, you’ve probably encountered the idea of using retirement funds to buy a business. The strategy is called ROBS — Rollovers as Business Startups — and it’s one of the most powerful (and misunderstood) tools in the business buyer’s toolkit.

At GoSBA, we’ve helped structure over $320 million in SBA-funded deals across 126+ transactions. We’ve seen ROBS used effectively as equity injection on SBA loans — and we’ve seen it done poorly. This guide covers everything you need to know: what a ROBS is, how it works, whether you can use it as a down payment on an SBA loan, the IRS compliance requirements, and the real risks involved.

What Is a ROBS (Rollover as Business Startup)?

A Rollover as Business Startup (ROBS) is an IRS-recognized arrangement that allows you to use funds from an existing retirement account — such as a 401(k), 403(b), traditional IRA, or other qualified plan — to fund a new or existing business without taking a taxable distribution or paying early withdrawal penalties.

The key distinction: a ROBS is not a loan from your retirement account. It’s a rollover. You’re investing your retirement funds into your own business by purchasing stock in a new C Corporation that you control. No debt is created, no interest payments are owed, and no early withdrawal penalty applies — as long as the structure is set up and maintained correctly.

The IRS does not consider ROBS an abusive tax avoidance transaction, but they do scrutinize these arrangements closely. According to the IRS ROBS Compliance Project, these plans are “questionable because they may solely benefit one individual — the individual who rolls over his or her existing retirement funds to the ROBS plan in a tax-free transaction.”

How Does a ROBS Work? The Step-by-Step Process

The ROBS structure involves several carefully sequenced legal and financial steps. Here’s exactly how it works:

Step 1: Form a New C Corporation

You must create a new C Corporation — not an LLC, not an S Corp. The C Corp structure is required because it’s the only entity type that can issue stock to a qualified retirement plan without triggering prohibited transaction rules. The C Corp will be the entity that operates (or acquires) the business.

Step 2: Establish a Qualified Retirement Plan Under the C Corp

The new C Corporation sponsors a 401(k) profit-sharing plan (or another qualified retirement plan). This plan must allow for rollovers from other qualified plans and must permit participants to invest in employer stock. The plan document must be properly drafted and should ideally receive a favorable determination letter from the IRS.

Step 3: Roll Over Your Existing Retirement Funds

You roll over (or directly transfer) funds from your existing 401(k), IRA, 403(b), or other qualified retirement account into the new C Corp’s 401(k) plan. Because this is a trustee-to-trustee transfer or eligible rollover, no taxes or penalties are triggered.

Step 4: The Retirement Plan Purchases C Corp Stock

The new 401(k) plan uses the rolled-over funds to purchase stock in the C Corporation at fair market value. This is the critical transaction — your retirement plan is now an investor in your company. The cash from the stock purchase flows into the C Corporation’s operating account.

Step 5: Use the Funds for Business Purposes

The C Corporation now has liquid capital — your former retirement funds — available to use for legitimate business purposes: acquiring a business, purchasing equipment, funding working capital, making an SBA loan down payment, or covering startup costs.

Can You Use a ROBS for an SBA Loan Down Payment?

Yes — and this is one of the most common and effective uses of a ROBS in business acquisitions.

SBA lenders require borrowers to make an equity injection (down payment) — typically 10% to 20% of the total project cost for business acquisitions. The equity injection demonstrates that the borrower has “skin in the game” and reduces the lender’s risk exposure.

The SBA’s Standard Operating Procedures (SOP 50 10) explicitly recognize several acceptable sources of equity injection, including:

• Cash savings
• Gift funds (with documentation)
• Home equity (via HELOC or cash-out refinance)
• ROBS — retirement funds rolled into a C Corporation
• Seller financing on standby (in some structures)

When you use a ROBS to inject equity into an SBA deal, the funds are treated as true equity — not debt. This is a significant advantage because SBA lenders distinguish between equity (which strengthens the deal) and debt (which adds leverage and risk). Since ROBS funds flow into the C Corp as stock purchase proceeds, there’s no repayment obligation, making it clean equity in the eyes of the lender.

How SBA Lenders View ROBS as Equity Injection

Most experienced SBA lenders are familiar with ROBS structures. However, the borrower typically needs to provide:

• Proof of retirement account balances — recent statements showing sufficient funds
• Documentation from a ROBS provider — confirming the C Corp formation, plan establishment, and rollover process
• Evidence that the rollover is complete (or will be complete) before closing
• An independent stock valuation — showing the stock purchase was at fair market value

Lenders want to verify that the ROBS is properly structured and that the funds are genuinely available as equity — not contingent on future events. Timing matters: ideally, the ROBS rollover should be initiated early in the SBA loan process so that funds are in the C Corp account before (or at) closing.

ROBS + SBA Loan: How to Structure the Deal

Let’s walk through a real-world example of how a ROBS and SBA loan work together in a business acquisition:

Example: Acquiring a $1 Million Business

In this scenario, the borrower rolls $105,000+ from their 401(k) into a new C Corp via the ROBS structure. That cash sits in the C Corp’s bank account and serves as the equity injection for the SBA loan. The SBA lender finances the remaining 90%.

Can You Combine ROBS + Seller Financing + SBA Loan?

Yes, and this is a powerful combination for larger deals or situations where the buyer has limited cash. Here’s how a three-part structure might look:

When seller financing is involved, SBA lenders typically require the seller note to be on full standby — meaning no payments of principal or interest for a specified period (usually 24 months) or until the SBA loan is current. The ROBS portion counts as pure equity, which is the strongest form of injection from the lender’s perspective.

This kind of creative deal structuring is exactly what we help buyers navigate at GoSBA. The key is understanding how each capital source interacts with SBA underwriting requirements — including post-close liquidity requirements and personal guarantee obligations.

Pros and Cons of Using a ROBS

Advantages

• No taxes or penalties on the rollover. Unlike a 401(k) withdrawal, a properly structured ROBS avoids the 10% early withdrawal penalty and income tax that would otherwise apply.
• No debt created. You’re not borrowing from your retirement — you’re investing it. There are no monthly payments, no interest charges, and no repayment schedule.
• Counts as true equity. SBA lenders treat ROBS funds as equity injection, not subordinated debt. This strengthens your loan application.
• Access to significant capital. If you have $100,000 to $500,000+ in retirement accounts, ROBS gives you immediate access to that capital for your business.
• Preserves cash reserves. By using retirement funds for the equity injection, you can keep your liquid savings intact for post-close working capital and personal reserves — which lenders also want to see.
• No credit impact. Since ROBS isn’t a loan, it doesn’t affect your credit score or debt-to-income ratio.

Disadvantages and Risks

• You’re risking your retirement savings. This is the biggest risk. If the business fails, you lose not just the business but the retirement funds you invested. The IRS ROBS Compliance Project found that many ROBS businesses “either failed or were on the road to failure,” with participants losing retirement savings accumulated over many years.
• C Corporation tax structure. ROBS requires a C Corp, which means potential double taxation — the corporation pays tax on profits, and shareholders pay tax again on dividends. This can be managed with proper tax planning (reasonable salary, retained earnings strategy), but it adds complexity compared to an S Corp or LLC.
• Ongoing compliance costs. You must maintain the 401(k) plan, file Form 5500 annually, conduct annual stock valuations, and ensure the plan doesn’t discriminate in favor of highly compensated employees. These requirements persist for as long as the ROBS structure is in place.
• Setup costs. ROBS providers typically charge $4,000 to $6,000+ for initial setup, plus $1,500 to $3,000+ per year for ongoing administration and compliance.
• IRS scrutiny. The IRS actively monitors ROBS arrangements. Their compliance project has identified patterns of non-compliance including failure to file Form 5500, failure to file Form 1120 (corporate tax return), prohibited transactions, and plan discrimination.
• Limited flexibility. Once your retirement funds are invested in C Corp stock, you can’t easily move them back. Unwinding a ROBS is complex and may trigger tax consequences.

IRS Rules and Compliance Requirements for ROBS

The IRS doesn’t prohibit ROBS, but they require strict compliance with retirement plan rules. Here are the key requirements:

Annual Filing Requirements

• Form 5500 or 5500-EZ — Must be filed annually with the DOL/IRS. Many ROBS sponsors incorrectly believe they’re exempt from this requirement. The IRS has specifically flagged this as a common compliance failure.
• Form 1120 — The C Corporation must file an annual corporate tax return, even if it has no taxable income.

Prohibited Transactions to Avoid

Under IRC Section 4975, certain transactions between the plan and “disqualified persons” (including the business owner) are prohibited. Common violations include:

• Using plan assets for personal expenses
• Paying above fair market value for the C Corp stock
• Lending money between the plan and the business
• Failing to maintain the plan for the exclusive benefit of participants
• Not offering the plan to eligible employees (if you hire any)

Non-Discrimination Rules

If your C Corporation hires employees, the 401(k) plan must comply with non-discrimination testing. You cannot restrict the plan to benefit only yourself. Eligible employees must be allowed to participate, which means you may need to make employer contributions on their behalf. This is one of the most overlooked compliance requirements and a frequent audit trigger.

Annual Stock Valuation

The C Corp stock held by the retirement plan must be valued at least annually by a qualified independent appraiser. This valuation determines the value of the plan’s assets and must be conducted according to accepted valuation methodologies. Skipping or inflating valuations is a red flag for IRS examiners.

How Much Do You Need in Your 401(k) to Do a ROBS?

There’s no legal minimum for a ROBS, but practically speaking:

• Minimum practical threshold: $50,000. Below this, the setup and ongoing compliance costs ($5,000–$8,000 in year one) eat too much into the capital.
• Sweet spot for SBA deals: $80,000–$250,000. This provides enough for a meaningful equity injection on a business acquisition in the $500K–$2.5M range.
• Large ROBS: $250,000+. For bigger acquisitions, a larger ROBS can cover the entire equity injection and even provide working capital reserves.

Remember: you don’t have to roll over your entire retirement balance. You can roll over a portion and leave the rest in your existing retirement account for diversification and risk management.

ROBS Providers: How to Set One Up

You should not attempt to set up a ROBS on your own. The legal, tax, and compliance requirements are too complex and the consequences of mistakes are too severe. Work with an established ROBS provider that handles:

• C Corporation formation and registration
• 401(k) plan document drafting and IRS determination letter application
• Rollover facilitation and custodian coordination
• Stock issuance and initial valuation
• Ongoing plan administration, Form 5500 filing, and annual valuations

Well-known ROBS providers include Guidant Financial, Benetrends, and Pango Financial, among others. When selecting a provider, ask about their compliance track record, their process for handling IRS correspondence, and what happens if you need to wind down the structure.

Setup typically takes 2 to 4 weeks, though it can be expedited. If you’re pursuing an SBA loan simultaneously, coordinate the ROBS timeline with your lender to ensure funds are available for closing.

Tax Implications of a ROBS

Understanding the tax landscape is critical:

• The rollover itself is tax-free. No income tax, no penalties — as long as it’s a proper trustee-to-trustee transfer or completed within 60 days.
• C Corp taxation applies. The business pays corporate income tax (currently 21% federal rate) on profits. If you distribute profits as dividends, you’ll pay tax again at your individual rate (qualified dividends are taxed at 0%–20%).
• Salary is deductible. You must pay yourself a reasonable salary as an employee of the C Corp. Your salary is a deductible business expense for the corporation and taxed as ordinary income to you.
• Retirement plan contributions continue. As an employee, you can continue making 401(k) contributions (up to annual limits) from your salary, and the C Corp can make employer contributions — effectively rebuilding your retirement savings.
• If the business fails, the retirement plan assets are lost. There’s no tax deduction for the loss within the plan. However, any remaining plan assets can be rolled back to another qualified plan or IRA.

Common Mistakes with ROBS (and How to Avoid Them)

1. Using an S Corp or LLC instead of a C Corp. The ROBS structure specifically requires a C Corporation. Using another entity type creates a prohibited transaction.
2. Failing to file Form 5500. The IRS flagged this as the single most common ROBS compliance failure. File it every year, even if you think you’re exempt.
3. Not getting annual stock valuations. This isn’t optional. The plan needs to know what the stock is worth to properly account for participant balances.
4. Ignoring non-discrimination requirements. Once you hire employees, they may be eligible for the 401(k). Excluding them can disqualify the plan.
5. Using ROBS funds for personal expenses. All funds must be used for legitimate business purposes. Mixing personal and business expenses is a prohibited transaction.
6. Not coordinating with your SBA lender. Some lenders are unfamiliar with ROBS. Work with a lender experienced in ROBS-funded equity injections to avoid delays or misunderstandings.
7. Rolling over Roth IRA funds. Roth IRAs generally cannot be used in a ROBS because the Roth structure doesn’t permit the same rollover mechanics. Stick with pre-tax retirement accounts.
8. Waiting too long to start the process. ROBS setup takes 2–4 weeks. If you’re under an LOI with a closing deadline, start the ROBS process immediately.

Frequently Asked Questions About ROBS and SBA Loans

Is a ROBS legal?

Yes. The IRS recognizes ROBS as a legitimate arrangement. It is not classified as an abusive tax avoidance transaction. However, the IRS does actively audit ROBS plans for compliance, so proper setup and ongoing administration are essential.

Can I use my IRA for a ROBS?

Yes, traditional IRAs can be used. You roll the IRA into the new C Corp’s 401(k) plan. Roth IRAs are generally not suitable for ROBS due to the different tax treatment and rollover rules.

Do SBA lenders accept ROBS as a down payment?

Yes. SBA lenders routinely accept ROBS-funded equity injections. The funds are treated as true equity, not debt. However, you’ll need to provide documentation from your ROBS provider confirming the rollover and stock purchase.

How much does a ROBS cost to set up?

Initial setup typically costs $4,000–$6,000. Ongoing annual administration (including Form 5500 filing, stock valuation, and plan compliance) runs $1,500–$3,000+ per year. These are legitimate business expenses deductible by the C Corporation.

What happens to my ROBS if the business fails?

If the business fails, the stock held by the retirement plan may become worthless. The retirement funds invested are effectively lost. Any remaining plan assets can be rolled into another qualified plan or IRA. This is the primary risk of ROBS — you’re putting retirement savings at risk.

Can I convert my C Corp to an S Corp later?

Potentially, but it’s complex when a ROBS is involved. Converting to an S Corp while the 401(k) plan still holds C Corp stock can create prohibited transaction issues. Work with your ROBS provider and tax advisor before making any entity structure changes.

Can I use ROBS and still keep some retirement savings?

Absolutely. You can roll over a portion of your retirement funds and leave the rest in your existing account. Many business buyers roll over just enough to cover the equity injection and keep the remainder diversified in traditional retirement investments.

How long does the ROBS process take?

Typically 2 to 4 weeks from start to funding. This includes C Corp formation, plan establishment, rollover processing, and stock purchase. Expedited processing may be available for an additional fee.

Is a ROBS Right for Your SBA Deal?

A ROBS can be an excellent tool for funding your SBA loan equity injection — but it’s not for everyone. Consider using a ROBS if:

• You have $50,000+ in a qualified retirement account (401(k), 403(b), traditional IRA)
• You’re comfortable with the risk of investing retirement funds in your business
• You need equity injection capital and want to preserve your liquid savings
• You’re prepared to maintain C Corp compliance and ongoing plan administration
• You’re working with experienced professionals (ROBS provider, SBA lender, CPA, attorney)

Think carefully before proceeding if:

• Your retirement savings would be entirely depleted by the ROBS
• You’re close to retirement age and can’t afford to lose these funds
• You have other, lower-risk sources of equity injection available
• The business you’re acquiring has significant risk factors

Next Steps

If you’re considering a ROBS to fund your SBA loan down payment, the best approach is to start with a clear understanding of your total deal structure — how much you need, where each dollar comes from, and how the pieces fit together.

At GoSBA, we help entrepreneurs structure SBA-funded business acquisitions from start to finish. Whether you’re using ROBS, cash savings, seller financing, or a combination of sources, we can help you navigate the SBA lending process and find the right lender for your deal. Reach out for a free consultation to discuss your specific situation.