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Thread: Should startup loan be repayed out of salary or as business expense?

  1. #1

    Default Should startup loan be repayed out of salary or as business expense?

    I am in the very early thought process of starting a business with a friend. He was going to get financing from his mother as a gift, but realized the startup costs would be too much. I decided I would put together a business plan and go to a family member to get a loan or investment. My question is, if my friend gets half of the startup capital as a gift and I get the other half as a loan, should that loan be repayed as a business expense or should it be a personal loan that I repay out of my salary?

  2. #2
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    Ok, if your friend puts in the money, is that owner's capital that's exchanged for equity/shares in the company or is it a loan? Is he expecting equity/shares for the money? Are you expecting similar equity/shares for your money? If you are, then it's not necessarily a loan, could just be owner's capital and your return on that capital comes from periodic dividends.

    Basically, you can do it any way you want; example is that some angels will loan you money, but expect cheap options to purchase equity as part of the deal. But whatever you decide for your business, your friend needs to be a part of the decision, because he might want the same deal or he might want a different deal or he might have strong opinions on your deal. Talk to him.

  3. #3

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    Although I agree with Freelancier that your friend needs to be part of the decision, in my opinion where each of you got your money to invest in the business is irrelevant from the standpoint of the business.

    It may be that two people putting in the same amount of money get it out in different ways if that is what they want, but the fact that one got his money as a gift from a close family member and one got his as a loan, or even if one already had the funds in the bank, are factors that the individual may take into account when deciding how he wants (or needs) to recoup his investment, but are not a good reason for the business to look at the funds differently.

  4. #4

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    This is a great place to start. When I work with companies that have multiple founders even ones that get along great and work hard in the business, it always comes up that their visions on the surface are the same but as we drill down, there are differences even though they all thought they were on the same page. The sooner you are able to have discussions of importance together the better. Having a clearly crafted business agreement is critical. Creating an operating agreement now is imperative. It is the pre-nup and if there comes a time that a split needs to be made or simply one person wants out, these and many other issues will be already addressed. You will need it at some point for some decision along the way.

  5. #5

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    It depends....

    If you and your partner are treating this business as through each of you are bring capital separately into the company and you bother will have separate capital accounts that you will track then in theory you are take a long to purchase a % of the business. In that case it would seem to be that the loan and related liabilities should sit with your personally.

    Alternatively if the family member giving the loan wants the to hold the company responsible for the debt, as that is the eventual end user of the money, then the company may be more appropriate and you would be able to take the interest expense to help reduce taxes.

    Now if I was making the loan I would want you individually and the company to be liable for the loan so I could go after both incase of default.

    Please note the kind of business and how you setup the entity would also have an effect.
    Phillip Zagotti
    Partner - Zagotti & Burdette CPA, LLC
    http://znbcpa.com

  6. #6

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    I bet I know where this disaster ended up. The guy that took out the loan from his family member never repaid it. The family member wishes he/she would have never got involved. They don't speak to each other anymore. The guy that used his gift money from his mother wasted his gift money but his mother still babies him and tells him it's ok and to forget about it and move on. The 2 guys that were friends are no longer friends. Another unhappy partnership/loan ending.....

    Or, do you think they hit the jackpot and are very rich by now?

    What's YOUR guess?

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    Because you have a business partner, his perspective will also be taken into account. Whether he got the money as a loan or a gift, that's his way of getting the money for business and you are getting your end from a loan for your business from a relative. Now, if it's a 50:50 business thing, this is your personal loan which you've taken from a relative and you'd be paying it from your personal pocket (your salary) and not from a business account.

    If you take this capital as a loan, your friend's capital will also become a loan in a way. He might ask to pay off that amount as well. Just because its a gift from his mother doesn't give you the chance to waive it off as a gift for yourself as well.

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    Im actually pretty interested how it all went

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    A full loan repayment isn't considered a business expense because the principal amount — the amount borrowed outside of interest — isn't a cost to your business. It's simply money you received and then paid back. However, the interest is considered deductible because it isn't part of the original amount borrowed.

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