Remember to keep your IRA separate from any conflicts of interests, just as you would from any family member. Your IRA and your retirement account should benefit from investments and business activity, not you.
“Children” that were are not legally adopted, aunts, uncles, nieces, nephews, cousins, in-laws, brothers, sisters, and non-blood related family friends.
It is wise to not to continue doing more self-directed business with that person. You should not be funding additional deals, adding equity, or seeking new deals with a disqualified person. If you want the investment to continue, you should not be changing or negotiating new deal terms other than letting the deal reach maturity and exiting it. A "transaction" is when money enters or leaves an IRA, or deal terms are renegotiated.
If you want to be extra careful, you should maybe find a way to exit the transaction with that person before this concern happens.
If you or disqualified persons for your IRA own over 50% of a company, the CEO, offices/directors, and highly compensated employees can all be disqualified.
If other disqualified people, such as your children or spouse, own parts of the company, this counts in addition to your ownership toward the 50% limit.
For example, if you owned 15% of a friend’s company, but your children owned 40%, that company and certain key persons would be disqualified from doing business with your IRA.
Generally, the laws are designed so that a person cannot attempt to avoid or unfairly reduce generational transfer or business owing taxes.
You can aim to make an investment with someone who is not a disqualified person, or search for a similar investment opportunity that is free from a disqualified person's involvement. Doing business with a disqualified person puts your IRA at risk of a forced distribution and other penalties by the IRS.
Forced distribution of the IRA or Roth IRA.
Early withdrawal penalties if you are below 59 and 1/2, which can be 10% plus ordinary income taxes for IRAs.
Putting all of your investment gains in a Roth IRA up for taxation from an early withdrawal.
The IRS may assign excise taxes of up to 15% for the amount involved for an error that was created unintentionally, which can increase to a full distribution if it is not fixed.
The IRS may also assign excise taxes to Solo 401(k)s up to 15%.