If you are thinking about using your retirement savings to start a franchise or expand your business, a Rollover as Business Startup (ROBS) can be a powerful way to make that happen. It lets you fund your business without taking on loans, giving up ownership, or paying early withdrawal penalties. When you understand how the structure works and follow the rules, it can be an incredibly effective tool for growth.
But there is something most entrepreneurs do not realize until they are already deep into the process: ROBS is only as safe as the way you manage it. The structure itself is legal and commonly used, but the IRS has very clear expectations for how it must be set up and operated. Most of the problems we see do not come from the ROBS itself. They come from small, unintentional mistakes that snowball into compliance issues.
At SAS CPAs, we work with franchisees, multi-location owners, and growing brands every day, and we see the same handful of mistakes pop up over and over. The good news is that every one of them is avoidable with the right setup and ongoing support.
If you need a refresher on how ROBS works before we dive in, our Ultimate Guide to Rollovers as Business Startups (ROBS) covers everything you need to know. Otherwise, let’s get into the common ROBS mistakes and how you can steer clear of them.
1. Not Setting Up the Right Company Structure
Every ROBS begins with a very specific legal foundation. You must form a C Corporation, establish a qualified retirement plan inside that C-Corp, and then you must roll your retirement funds into that plan, so the plan can purchase company stock. Only a C-Corp can issue the kind of stock required for ROBS.
Those steps are not flexible. They are the exact sequence the IRS expects, and they are the reason the rollover is not treated as a taxable event.
But where mistakes happen is when owners:
- Form an LLC out of habit
- Create the wrong type of 401(k)
- Issue stock incorrectly
- Make changes to the plan without following required procedures
Even something that feels small, like delaying issuance of shares or modifying eligibility rules, can accidentally break the structure. Once that structure is compromised, the IRS can argue the rollover was never valid in the first place.
If a step relates to corporate structure or the retirement plan, always check with someone who handles ROBS plans regularly.
2. Using ROBS Funds for Things They Were Never Meant to Cover
Once the business is funded, things start to get busy. Bills come in, you make purchases, you reimburse yourself for start-up expenses, and cash begins flowing in and out. This is where many owners get into trouble, because ROBS funds are held to a different standard than normal business capital.
From that point on, every dollar must be used for legitimate business purposes and tracked carefully. But when you are new and wearing ten hats, it is easy to make small mistakes like:
- Mixing personal and business purchases
- Reimbursing yourself without receipts
- Paying yourself too soon, or more than the business can support
- Using ROBS money to pay promoter or consultant fees
- Not documenting how you calculated reimbursements
None of these things may feel serious in the moment, but they can create real compliance issues. If the IRS reviews your plan and sees untracked reimbursements or personal expenses mixed in, they may view it as a prohibited transaction.
3. Forgetting That Employees Must Be Offered the Retirement Plan Too
This is one of the biggest surprises for business owners. Once you start hiring staff, your retirement plan must also be offered to eligible employees. This is not optional, and the rules around employee eligibility are strict.
This includes offering them the ability to make contributions into the plan and, when applicable, the ability to purchase company stock through the plan. If the plan excludes eligible employees or delays participation beyond what the plan allows, you can unintentionally violate nondiscrimination rules.
The practical reality is that the more your team grows, the more administrative responsibility you have.
Common errors include:
- Forgetting to track employee eligibility dates
- Not giving employees enrollment forms
- Making informal “exceptions” that conflict with the plan
- Assuming part-timers or short-term employees are automatically excluded
The IRS takes employee participation seriously, because retirement plans are meant to be fair and accessible.
If you hire employees, make employee-plan administration part of your regular monthly workflow. A CPA or third-party administrator can manage this easily, but it must be intentional.
4. Missing Annual Filings and Documentation Requirements
Many business owners assume that once their ROBS is set up, they can shift gears and focus only on operations. But a ROBS-funded business has a few additional filings and documentation requirements that cannot be ignored.
These include:
- Filing Form 1120 for the C-Corp each year
- Filing Form 5500 for the retirement plan
- Maintaining accurate annual stock valuations
- Keeping updated plan documents and board records
- Retaining copies of all reimbursements and plan transactions
Most IRS issues occur because the owner simply missed a filing or did not update something that changed in the business. These are all preventable problems with the right support system and an experienced CPA that managed ROBS.
5. Thinking of ROBS as a Shortcut Instead of a Long-Term Investment Strategy
Finally, the most important mindset shift: ROBS is not a loophole or an easy way to withdraw retirement funds early. It is a legitimate investment structure that relies on the business being real, active, and operated with the intention of generating profit.
Where owners get into trouble is when they:
- Treat the funds like personal cash
- Do not stay involved in the business
- Stop following plan rules once the business becomes busy
- Let administrative tasks slide until it is too late
ROBS works beautifully when the rules are respected. But it is not a “set it and forget it” structure. You need to operate your business with the same discipline you would expect from a publicly traded company. You’re expected to have clean records, good documentation, and a clear separation between personal and business finances.
The Problem With All These Mistakes: IRS Disqualification
Most people hear the word “audit” and worry about paperwork. With ROBS, the stakes are higher. If the IRS determines that your plan was not managed correctly, it can invalidate the entire rollover and treat the original transfer of funds as a taxable distribution.
This means:
- You may owe income taxes on the full amount rolled over
- You may owe early withdrawal penalties if under retirement age
- Interest may be applied
- The retirement plan may lose its tax-advantaged status
The fact that all of this is preventable is exactly why you want to set things up correctly from the start and monitor them regularly.
How SAS Helps You Avoid These Problems
A ROBS can open the door to opportunities that might otherwise feel out of reach. It allows business owners to invest in themselves, avoid high-interest loans, and build something meaningful without draining cash flow. But as powerful as the structure is, it only works when the compliance pieces stay intact.
The biggest risks come not from the ROBS itself, but from small operational missteps that build up over time, like missed filings, undocumented reimbursements, or administrative tasks that slip through the cracks as the business grows. This is exactly where having the right partner matters.
At SAS, we help business owners stay ahead of these issues long before they become IRS concerns. Our team understands the rhythms of franchise and multi-location businesses, and we know how to manage the unique compliance requirements of an ROBS-funded company.
If you need help with ROBS accounting and compliance, book a call with us to see how we can support you.
