THE BEST WAYS TO PUT MONEY INTO YOUR STARTUP

Your start-up needs pre-seed capital, and if you’re bootstrapping, there are two main ways to out money in and account for that money.

Do I lend money or invest money into my business? There are benefits as well as tax consequences and risks to each course. Each depends on your individual tax and financial circumstances and your business type. I’m not an accountant, and tax laws vary by region so ask an accountant.

Lending Money to Your Business.

If you are registering a partnership or corporation, in most cases you will need to make an owner contribution as your share of the business capital. In this case, you would be making an investment, not a loan.

When you lend money to your business you become a lender. I suggest that you write up a business loan agreement. Make sure the loan terms are written so you have an arms-length transaction that clearly separates you from the business and that puts everything in writing, including the interest rate on the loan (if you’re charging interest), how the loan will be repaid, and the consequences if it isn't repaid.

If you charged interest, the interest on the loan is taxable to you personally when it is repaid. When you file your tax return, you may need to file a form showing the total interest you received during that year. Your business repayment of the principal is not taxable since you have already paid the taxes on it.

Investing Money in Your Business

If you put money into shares or ownership in your business, you are an investor.

If your business is not a corporation, you can put money into your business by just writing a check and depositing it in the business bank account.

If you business is a corporation, you’re a shareholder in the business. If the business is small and there are only a few shareholders you can own most of (or all of!) the business.

If your investment isn't in stock, you can take out the money at any time. For example, you can take an owner's draw out of your owner's equity account. Your draw isn't taxable to you when you take it out because you have already paid tax on your business net income.

If you take money out by selling stock or get a dividend on your stock, you pay capital gains taxes on these payments.