Exiting a C-corp held by a ROBs / 401K

June 05, 2025

by a searcher from Babson College in Clinton, CT, USA

One of the primary benefits often promoted of using a ROBs is that you're holding shares of the company in a tax deferred account and therefore when the business is sold, there's no tax on the gain. The analogy often used is if your 401K owns stock in XYZ company and it sells those shares for a gain, there's no tax on that gain inside the 401K account. (But funds are taxed when withdrawn.) But here's the thing...this only seems to be true if the company is sold as a stock sale, no? And how many small businesses are being sold as stock sales? I understand it's not many. My understanding is if I were to exit a c-corporation as an asset sale, which I believe is more common, then the capital gains tax would be due the company (21%) before any distributions are made to shareholders. A - Can anyone who's verse in ROBs / c-corp taxes confirm if this is the case and if so... B- Doesn't that diminish one of the primary benefits of the ROBs? (Say vs just taking a straight up 401K withdrawal) I mean I guess you avoid paying the 10% early withdrawal penalty, and tax rates could be higher if you took a large sum out in a single tax year. But on the bright side, you could then structure the business however you want, (vs the required C-corp for a ROBs), avoid the upfront ROBS fees ($5K) and ongoing annual fees ($2-$3K), and all the hoops that come with it. What am I missing??

Reply by a searcher
from Northwestern University in Newtown, PA 18940, USA

I can't confirm or deny your tax treatment question, but I will push back on the idea that tax treatment upon exit was a driving factor or benefit for me. But you're likely right, as all distributions would be subject to the C Corp tax rate prior to being paid to shareholders.

Reply by a searcher
from Babson College in Long Island, New York, USA

Hey Dan, I have a ROBS corp. I would probably not have done it if I had other options at the time, and it's more headaches than it's worth but it's not that terrible. for one thing, many businesses are sold for stock sales for different reasons all the time. As a buyer, we usually prefer asset sales, but it's the seller who sets the terms. lots of times if the buyer really wants the tax benefits of an asset sale, they can do an F-Reorg. second, if you're not selling using a product like an SBA loan, you have a lot more flexibility in how you structure the sale. This would not work with SBA, and might be a stretch for conventional bank debt to get comfortable with but should be fine for a private sale to a strategic or PE. you can structure a sale in which you set up a new entity that has an option to buy your Robs corp stock (important that it HAS to be as current 3rd party verified market value at the time of executing the option, otherwise options for Robs corps are a no no - in fact, use different words instead of "option") then you get the buyer to fund the sale where the funds go from the buyer to the new company, which then executes the option to acquire the stock from your 401K, which converts the company to a regular non-ROBS c corp. now as the sole owner of the corp, you can transfer the assets to the buyer. Not 100% sure of the tax implications of all that. third, if you hold the ROBS corp long term, you can structure the 401K to allow stock distributions are allowable part of your mandatory distributions so if you don't sell the company and you're past retirement age you can slowly transfer the stock from the 401K to your person (and then assuming to a trust) without tax consequence.

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