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Thread: Borrowing money from family member to purchase existing business. Best approach

  1. #21
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    Hi! @ally567,
    I agree with KnightNguyen, before anything, make sure that you or an SME can review the financial statements and franchise agreement. Numbers are meaningless until you have a clear picture of the company health. As soon you verify that financial indicators are ok, you can proceed with the analysis of your financial needs. regards, J

  2. #22

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    I take this opportunity to ask seniors here whether it is possible or feasible for a business owner to make a formal loan to his own company (eg. LLC) rather than directly injecting capital into it.

    If yes, what would be the proper procedure to accomplish that?

  3. #23
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    Yes, it is possible. Write up a loan agreement between your person and your LLC that includes a re-payment schedule, make sure that the LLC is paying you a reasonable interest rate on the loan, but also make sure that you report that interest as part of your personal income on your personal tax return. At least that is how I would do it (I've always just made contributions of capital).

  4. #24

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    Quote Originally Posted by tallen View Post
    Yes, it is possible. Write up a loan agreement between your person and your LLC that includes a re-payment schedule, make sure that the LLC is paying you a reasonable interest rate on the loan, but also make sure that you report that interest as part of your personal income on your personal tax return. At least that is how I would do it (I've always just made contributions of capital).
    Thank you for your comments. Much appreciated.

    I would then like to know also how direct contributions of capital is done, and whether this is preferable to taking a loan from oneself. Are there any pros and cons to it?

  5. #25
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    Quote Originally Posted by libra View Post
    I would then like to know also how direct contributions of capital is done, and whether this is preferable to taking a loan from oneself. Are there any pros and cons to it?
    You write a check from your personal bank account made payable to your business and deposit it in your business bank account. In the accounting system for your business, you would record this deposit as an increase in your owner's equity account.

    To me this is a lot simpler than a loan -- you don't have to keep track of payments, interest, and the outstanding balance on an ongoing basis.

    The con would be if you don't have the money available to make the investment, or you do but wanted to use it for something else -- in that case the loan might be better because you've obligated your business to pay you back on some schedule. Of course, assuming your business still has the money liquid, you could also take it back in the form of an owner's draw, distribution, or dividend (whatever you want to call it), but presumably the point of making the investment (or giving the loan) was for the business to spend that money to carry on or grow the business.

    Loans might make sense if your business has multiple shareholders or members, not all of whom are ready to make an additional investment, and/or where reallocating the distribution of shares accordingly might be problematic.
    Last edited by tallen; 06-03-2017 at 09:09 AM.

  6. #26

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    Thank you, @tallen for enlightening.

    I was also thinking about when in case the business happens to be temporarily in the red, at least the loan repayments could still be in effect. What are your views in this regard?

  7. #27

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    My take is that Family and social relationships should never monetized in the form of lending and borrowing money. It can be treated and seen as financial abuse which for various reasons is illegal. I don't know, i guess it also changes the relationship to a business relationship and this can never possibly work with the resulting stress and friction in the event of an inability to pay.

  8. #28

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    Quote Originally Posted by libra View Post
    Thank you, @tallen for enlightening.

    I was also thinking about when in case the business happens to be temporarily in the red, at least the loan repayments could still be in effect. What are your views in this regard?
    Guess I will need to search on basic accounting theory on the Web. Thank you anyway for the previous answers.

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