When people first learn about using their 401(k) to fund a business, one of the first questions is: why does it have to be a C corporation? The answer lies in the specific legal and tax structure that makes the Rollover for Business Startup (ROBS) arrangement possible.
The ROBS structure with Business Funding Trust works because qualified retirement plans — like a 401(k) — are permitted to invest in employer stock. A C corporation can issue stock, and that stock can be purchased by the corporate retirement plan. This is the transaction at the heart of ROBS: the plan buys stock, and the corporation receives the proceeds as operating capital.
What You Need to Know
S corporations cannot be used for ROBS because it’s stock cannot be owned by a third party. LLCs and partnerships do not issue stock in the traditional sense, which also disqualifies them. Only the C corporation structure supports the stock issuance that ROBS requires.
While many think C corporations create double taxation that does not have to be the case with proper planning. They are taxed as separate entities from their owners and it is part of what creates the legal separation needed for ROBS to work properly.
As the person who’s retirement funds were used you will be an employee of the C corporation and will draw a salary. That salary is subject to ordinary income taxes and payroll taxes. The corporation itself will file its own tax return.
The C corporation is not just a formality. It is the structural foundation that makes the entire ROBS arrangement legally viable, and understanding its role helps you make a more informed decision about whether this funding path suits your goals.
Ready to Take the Next Step?
Ready to explore whether your 401(k) can fund your entrepreneurial dream? Contact Business Funding Trust today for a free consultation. Our specialists can walk you through your options, help you understand the process, and lead you to a successfully funded business.
