In today's economic climate, it may be difficult to get a business loan to obtain, especially for a start-up. As a result, many entrepreneurs start using their company through personal sources of money, such as savings and pension funds.
In this article we present some guidelines on how personal money put in a business in a way that tax and legal risks are minimized. After we cover the advantages and disadvantages of various options to invest personal money in a business.
Please note that this article general tips on how to finance your business with personal money sources. Fit Small Business is not a legal service or accountant. We always recommend a legal or tax professional for specific advice questions.
Did you know? If you as account $ 50,000 to retire, you can use this money more to start or buy a business without early withdrawal to pay penalties. Click here to learn more.
Step-By-Step Guide to Putting Personal Money in a business
Personal Money is money that you have to get, or borrow as an individual and not under the name of your company. Examples are borrowing from your savings, loans from friends or family members, consumer credit, personal loans, pension fund, and home equity loans or lines of credit.
If you. Just starting a business or have bad credit, can be more profitable use as a company to obtain loan personal money, many of which have credit score and time in business requirements
Note that even if you get a business loan, your personal assets may be at stake. Most business loans require a personal guarantee, which means that the lender can go after your personal assets if you. On the standard loan But that is not what this article is about. This article is actively investing personal money in a business, to get the business going or to generate working capital.
If you are planning your business to finance with personal money, read on for a 4-step guide on how to do this.
1. Consider the risks of the use of private wealth and how much you need
Howard Rosen, an experienced CPA and president of Consulting Services Conner Ash PC says the first thing he has customers who are planning to finance, demanded their businesses with personal money: can you afford to lose?
Although most people go into business for certain thinking that they will be successful, on fail half of the new company in the first five years. Rosen warns borrowers about their chances for business success in the face of the industry, to be realistic, that they in and existing competition. If the business goes well, the owner can lose their savings, pension funds or other personal assets they have invested in the business.
Rosen advises entrepreneurs to think carefully how much money they need for initial capital and working capital. Starting and running a business are often more expensive than most people think entrepreneurs. You want to make sure you put enough money in your business, but also keep on enough personal wealth for a rainy day.
If you. A job or another source of income, regardless of the business that you can put more personal money into the business permit, because you to receive a regular supply of cash If you are looking for ideas on low-cost side business, you could for extra income to explore here a glance.
2. Select your business structuring carefully
An entity may be organized as a C or S corporation, LLC, partnership or sole proprietorship. "The structure you choose will go, how you personally bring money into your business," says Rosen.
Most businesses start as a sole proprietor or partnership, and later as a LLC or a corporation to reorganize as they get bigger. The advantage of limited liability companies and companies is that they protect the business owner from personal liability for the debts and liabilities of the company.
It is difficult because the formalities to put personal money into a C or S corporation, which must be followed. For example, if you invest money in a corporation, you have to issue shares and record the transaction in the company's books. Moreover take personal investment of a C corporation is treated as a taxable dividend.
Rose-money is much easier in person, in and out of the sole proprietorship, LLC or partnership to move. Specifically Rosen recommends LLCs as a structure to many small businesses because it provides almost as much legal protection as a corporation, but it is much easier to transfer money in and out of a LLC.
Not sure whether to go with an LLC or other business structure? Check out our guide Choosing a Corporate Structure .
3. As the business of the fund: Shares or Loan
Personal money can go to a store as equity (ie investment) or be treated as a loan that must be repaid by the company.
In general, if you are as organized LLC, sole proprietorship or partnership , it's best personal money invest and increase your equity in the company. Why? As equity ensures a stronger balance sheet as a loan. Howard Rosen says banks and suppliers want to work with the companies. More equity than loans especially banks want to make, receive first in the event of a failure paid, so they do not like to see many other loan on your balance sheet.
are not taxable investments in a business, says Micah Fraim , a Roanoke, Virginia-based CPA provides tax, accounting and advice for small businesses. Taxable income arises only if the revenue or sales of a type. If you put your personal savings in your company, for instance, that does not count as income. This is simply a business owner to invest in the company. It is not considered income, so it will not be taxed.
When personal money in a put corporation , you can treat them to be regarded as loans and not as equity. When you invest money in a C-Corporation as equity, then it is impossible to get it without back taxes because the investment of the company take is treated as a taxable dividend. Even for an S Corporation, made money on what you, the company is set to taxable.
This is not to say that you never have to personally invest money in your company. Rosen advises clients as much to invest, as required for initial capitalization, but put additional money into the corporation for working capital or other needs should be treated as a loan, so it is not taxed.
loans have a tax advantage that equity not. Interest on a loan is a business expense which reduces your taxable income. For example, if you take a loan from a friend or a personal loan from a bank, you can deduct the interest on your tax return. However, if you borrow money to your business from your own savings, the interest must be deducted on your business return or Scheme C (for individual entrepreneurs) as income personal on your reported tax return, so that it is ultimately not benefit.
when. A loan from a family member or a friend, even if they insist on giving you an interest-free loan, which is usually not a good idea free loan interest can gifts considered by the IRS and is subject to taxation.
4. Keep a paper trail, and independent business money by Personal Money
After you have decided whether personal funds as equity or be treated as loans, is the final step, the means to transfer your business checking account and transfer to your business' accounting document. If you later, take a salary or give other personal purposes, you should document that also in the records.
If you set a capital investment in a corporation, ensure that you follow all corporate formalities relating to the issuance of shares and the transaction in the corporate ledger recording.
If you treat money as a loan, you should the loan in a document promissory note . A promissory note is a legal document that approves the business to borrow from the individual. The individual may be a family member, a friend, etc.
Micah Fraim stressed that it is important to have small business with a clean paper trail (which often includes a promissory note). It is important that the paper trail make it very clear to "what the loan proceeds are used for. When the paper trail is muddy, then, if a test, the IRS will be much more inclined to prohibit the interest expense, which the business use is unclear . "
Always get a separate bank account and separate accounts for business affairs. Company for personal separation is particularly important for LLCs and corporations. If you mix personal and business assets, could be a court "the veil penetrate", which means that it can hold you personally liable for company debts and legal obligations. Rosen also says private entrepreneur should have a separate business account and records so that they can not pay back any personal assets to creditors exposed to in case they are a credit.
Ways Personal Money to invest in a business
There are numerous ways, personal assets in a business funnel. Here are the main methods and their advantages and disadvantages.
from your savings Borrow
If you are willing to take money from your life savings, you may add your company without funding debt.
Pros:
- It’s Your own money, so you have to pay back or the interest payments do not necessarily creditors. to make
- have complete control over how you use the money and run the business.
Cons:
- If the business fails, you can lose your hard-earned savings.
family and friend lending or investment
family and friends are a great resource for small companies are trying to borrow money. You can in the business in exchange for an ownership interest (equity) investment, or they may be money for the loan business.
Pros:
- Loved those who will not be so much about your credit score or collateral.
- family / friend loans are low (average rates are 5-8%) and care convenient.
Cons:
- If the business fails, it can cause tension with family and friends.
- family and friends can give unsolicited business advice.
- family and friends who receive equity are legally entitled to a certain control over the company.
consumer credit
many business owners shy away from , the use of credit cards to finance their businesses . However, they can actually be a relatively inexpensive, quick way to obtain funds. As an added bonus, you can take advantage of a promotion April or rewards points / cashback for purchases.
Pros:
- Relatively Great Rates ranging 8-24%.
- Many cards you can earn rewards points or cashback on purchases.
Cons:
- Need a good credit score for a good credit card.
- Limited to qualify by your credit line in what you can buy.
- Not everything is to be paid with a credit card.
Personal Loans
Personal loans can be used to finance a business. They can be obtained from your bank or from an online lender as Lending Club . They are a good choice when you start the business, and if you need a small loan quickly.
Pros:
- Can be used to finance a start-up or low-revenue business. to get
- Faster and less paperwork than a business loan.
- No collateral required.
Cons:
- Need good credit to qualify.
- Small amounts of funding is available (up to $ 35,000 from Lending Club).
Retirement means
Some people invest funds from their 401 (k) plan or retirement account in their business. A Rollover for Business Startups (ROBS) allows you to this retreat without doing penalties or income taxes early. A ROBS can be risky, because if the business fails, your nest egg can be extinguished. However, it is a great way to a new business or buy an existing business to start.
Note : There are several control and law with a ROBS issues related, so we recommend the use of suppliers , which will set up this kind help financing.
Pros:
- Not a loan, so you do not have to worry about interest rates, collateral or credit score.
- No early withdrawal penalties or income taxes.
- If your business is successful, your profits will grow advantaged retirement account in a control.
Cons:
- If Your business fails, will shrink your pension fund or be eliminated.
- only a viable option if you have $ 50K or more savings in your retirement account.
- you increase your chances of an audit by the IRS or Department of Labor (but providers you can help).
is home equity loans or lines of credit
Home Equity for channeling personal funds into a business one last option , If you are a homeowner, you can take secured a loan or a line of credit from your house.
Pros:
- Popular Way to finance start-ups and existing businesses.
- Very low interest rates (2.5-8% on average).
Cons:
- If You fall behind in payments, can you could lose your home.
Bottom Line
At some point or another, most business owners rely on personal funds to finance its activities. It is important to weigh the risks of investing personal assets in a business and to have a plan B in case things putting do not work as planned. personal money in a business is not complicated if the four steps, advice above a legal or tax professional as needed.
Did you know? follow you more than $ 50,000 in have your retirement account, you can use to start this money or buy a company without having to pay early withdrawal penalties Click here to read more
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