Is It A Good Idea To Loan Money To Your Own Company?
You are going to come across a lot of home-based businesses that are being started. One of the challenges that most entrepreneurs face when starting any new business is from where to get the working capital or money to get the business started. It can sound to be an easy thing to loan money to your own company but there are legal and tax hitches that you are going to face. Investing money to your business is the other good thing that you can do. You have to make this decision on time in the business forming process. continue to read on in this article to learn more about the difference between loaning and investing in your new adventure.
There are several ways that you can use to loan money to your company. The first one is to borrow money to start your company. If you select to borrow money to start your own company, you can do this through your friends or relatives or even apply for a commercial loan through your bank or even small business administration. There are both risk and benefits in all of these avenues. You need to think about them all.
Lending your own company is the other way of loaning money to your business. You will likely be creating debts to your company when you loan some money to it. You are also going to be the financier. The idea is that the company will have to repay you the money, the basic interest every month. The loan has to be arm's length if you don't want to violate the tax laws in any way. Despite you being the lender to your company, it will be crucial for you to make sure you shortlist the terms and conditions that any other lender would follow and make sure that you adhere to them the best way possible. the best cause of action here is to make sure that you have a third party to draw up the paperwork.
You can also loan money to your company by investing money in it. This is the point where you should be treating your company as an investment. At this moment, there will be no regular payments of loan. Stopping to offer you contributions or investments could mean you begin to pay personal capital gains tax. If you withdraw any other money from your company either as dividends, bonuses or draws, know that these are likely going to affect your taxes. Your company at this instance will not have tax consequence. You have to expect to have a return on investment just in case your company incurs liquidation. You will only have a benefit to your taxes of taking the investment as a loss.