Fortunately, ROBS lends itself to almost every kind of business, with very few exceptions. Though the exceptions to the types of businesses ROBS can fund are few, they have a crucial impact on keeping your ROBS transaction tax-free. Here is a checklist to ensure your proposed business meets these standards: The Business Must be Federally Legal. Any business funded through ROBS must be federally legal and based in the U.S. Pot shops (even in states where it’s permitted) are not eligible for ROBS because they are not federally legal. In addition, businesses operating outside of the United States (even if the owner resides in the U.S.) are also not eligible. The Business Must Be an Active Operating Company. An operating company is defined as an entity that is primarily engaged in the sale or exchange of a product or service instead of simply the investment of capital. For most business owners, this is a non-issue. There are times, however, when individuals are looking to invest in a hobby. Hobbies are not active businesses and thus are not eligible for this method. Nor can a ROBS arrangement be used for a business for which the primary activity is deemed to be the investment of capital. The Business Must be Owned by a C Corporation. The ROBS process requires you to create a new C corporation. The parent company must be a C corporation. You’re allowed to operate the business itself as an LLC or sole proprietorship as long as the parent company is a C corporation. In other words, for tax purposes, all finances flow through the C corporation. Learn more about the ROBS process in Chapter 6. You Must be a Bona Fide Employee of the Business. You must be a bona fide employee of your business — not solely a passive owner or investor. A common misstep here is when someone wants to use his or her retirement funds to buy a business for a family member or friend. With ROBS, you can’t purchase the business then step away.