IRS Penalties

• The Internal Revenue Service has both self-dealing rules and prohibited transactions that limit what you can do with your IRA. If you violate either set of prohibitions with your business investment, that portion of your IRA will be considered a distribution, or withdrawal, from your account. As such, it will be subject to the IRS's 10 percent early withdrawal penalty if you are not yet 59 1/2, in addition to applicable income taxes.
  
  

Business Structure

• You can invest in any business that is not a general partnership or S corporation; allowable business structures include C corporations and limited liability corporations. You cannot own a controlling share of the business in which you are investing, nor can you be its primary employee.
  
  

Prohibited Transactions

• The IRS prohibitions are intended to prevent you from benefiting twice from your IRA investment. Your account is allowed to collect any money your business investment makes, and you can withdraw those earnings without penalty once you retire. In the meantime, you are not to benefit from the business in any other way. That means you cannot sell anything to the business or purchase anything from it; nor can you take a loan from your business or receive a loan from it.
  
  

Disqualified Persons

• Self-dealing rules also prevent you from making an IRA investment that would benefit your spouse, parent, grandparent, child or grandchild; the IRS considers both ancestors and descendants to be "disqualified persons." Therefore, your IRA cannot buy, lease or sell a business to a disqualified person. Additionally, a business your IRA owns cannot provide goods or services to a disqualified person. Note that aunts, uncles, siblings and cousins are not disqualified people.