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Legal Tip: Funding a New Company Running a Business

Discussion in 'Business Legal Issues' started by Terry_w, 17th Nov, 2016.

  1. Terry_w

    Terry_w Active Member

    30th Aug, 2016
    Funding a New Company Running a Business

    When starting up a new business under a company structure funding will be needed. Most people would just use their own personal cash without further consideration, but this should be avoided for legal and tax reasons.

    The best way to proceed would be for someone to lend money to the company under a written loan contract. The loan could be interest free or at interest. If interest is charged the company may be able to claim a deduction – but at start-up it may not have much income which the deduction could offset. The lender will be taxed on the interest income received – so it may be worth considering a loan interest free.

    It should still be under a formal written agreement for the following reasons:

    1. Others may be involved in the company and they may or may not also be lending money the company and disputes can arise over this.

    2. The business may fail – you may be able to personally claim a deduction for the money you have lost;

    3. If the business fails – you would be a creditor and may get some of your money back with other creditors. If you take a charge over the company or its assets you may be a secured creditor and take priority over other creditors.

    4. You may lose control of the company – if others are involved this may especially be the case, but even if you are on your own as sole director and sole shareholder you can lose capacity and then someone else will take control as your attorney and appoint themselves as director. They may not know or understand if the money that came from you was a loan or a gift.

    5. Oral agreements leave little evidence and the terms of the loan are important.

    6. Getting your money back – there is a change it could be deemed a dividend and then you would pay tax on your own money.

    Generally the same situation will apply to where the company is acting in its own right or as trustee of a trust.

    Summary – don’t pay company expenses yourself, but lend the money to the company and have it pay its own expenses.
    andrew_t likes this.