Investing in or Lending Money to Your New Florida Business: What’s Better?

EPGD Law Business Law

Investing in your new business is a financial risk that many business owners take in order to grow their company. By taking that risk, individuals are forecasting positive return in the near future. Like anybody in the economic market, business owners want to ensure that their companies reach success in the long run. In the alternative, an owner may opt to treat their initial financial contribution as a loan, so that once the groundwork is put in place and the business is up and running, the company will essentially repay the loan back to the owner. Deciding which is a better option takes long though and strategic planning.

How do I Loan Money to my New Business in Miami?

As you choose to lend to your new business, the intent of the loan is to financially provide for the company until it has made enough money to successfully repay the debt. Even as owner of the business, you are also the lender, who will reasonably anticipate repayment pursuant to the terms of the loan agreement. With that being said, it is encouraged to follow all proper formalities and procedures when providing a loan for your business. For example, a common term used in order to draft an adequate loan agreement without violating tax laws is known as an arm’s length transaction. This is to ensure that the agreement is made freely and independently between both parties, and that the terms are appropriate. Therefore, even as both owner and lender, the agreement will stipulate and divide both parties so that they do not intertwine.

Once your company has this loan, it is then considered a debt. Thus, any type of interest accrued each month upon the amount of the loan will have to be written off as a company expense. This is rather a good thing in terms of lowering taxes, as expenses help drop the amount of taxes that a company must pay. However, as a lender, your personal income taxes may go up as the interest that you collect from the loan will have to be considered part of your income.

What is a Capital Investment in Business?

In order to further business operations once a company forms, an owner, or venture capitalist, will wish to invest their own funds into the company. Capital investment funds are usually acquired by a business to purchase assets such as equipment, tools and land. These are known as capital assets, because they are rendered useful and beneficial for the business, while intended to expand its day- to-day operations.

Investments to your business are not financial burdens, in fact, they are incentivized after the company takes off and becomes successful. Nevertheless, it is up to you, the owner, to make the decision and decide if your personal contribution is appropriate. Your investment will satisfy your business objectives, whether it by building your team, marketing and improving the overall aspects of the business. Whether the anticipated return profits come immediately or sometime after, it is all along the lines of usual business processes. On a tax level, once your financial investments gain return and you choose to withdraw your capital contributions, you will likely need to pay a tax on the gains. This is known as capital gains taxes. The same goes for losses, a business owner or shareholder may incur potential losses if their capital contributions were written off and sold for lesser value than the original purchase price.

EPGD Business Law is located in beautiful Coral Gables, West Palm Beach and historic Washington D.C. Call us at (786) 837-6787, or contact us through the website to schedule a consultation.

*Disclaimer: this blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*

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