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What to consider before lending money to family and friends
When your best friend views your
nest egg as a source of start-up funds for his latest business venture, or your
nephew hits you up for a car loan, your first impulse may be to reach into your
bank account to help. But it's a fact that loans to family and friends often
end up straining both finances and relationships. As Shakespeare said,
"Loan oft loses both itself and friend." In other words, if you lend
money to friends, you often don't get paid back, and the friendship itself may
disintegrate.
It's best to consider a loan to
someone you love as an "arm's length" transaction. If you're
pondering such a loan, keep the following in mind:
* You can just say "no."
It's your money, after all. Do you really want to raid an emergency fund or dip
into your child's college account to finance a friend's business idea? Think
like a bank. It's reasonable to ask tough questions about the person's bank
accounts, potential sources of income, planned use of loan proceeds, and
spending habits before extending credit.
* Consider a gift. If you're
comfortable sharing your resources, you may want to provide a monetary gift
with no strings attached. In many cases, this is the best solution because
neither you nor your friend expect the money to be paid back. Unlike a loan, this
type of arrangement can forestall misunderstandings and hurt feelings later on.
Of course, you should not give money if doing so would unduly strain your own
finances.
* Formalize loans. If you decide to
lend more than a small amount to a friend or family member, it's generally best
to draft a written agreement. This can be as simple as filling out a promissory
note (available online or at office supply stores). Such forms spell out the
basic terms of the loan -- amount, interest rate, payback period -- and provide
some limited protection should you and the borrower end up in small claims
court. Another recent innovation is the use of direct lending (also called
social lending or peer-to-peer lending) websites to facilitate loans between
family and friends. For a fee, such sites can prepare loan documentation, send
payment reminders, issue regular reports, even facilitate electronic fund
transfers. If the loan involves a significant amount of money, check with your
attorney.
Remember: Many personal relationships
have been damaged when loans go awry. So proceed with caution.
Posted in general
Are you starting or planning a new business this year? If yes, make sure you consider these five items into account.
Hello, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.
- Business plan. You need to outline who will own the business and what the legal structure will be, your qualifications to run the business, the competitive market you face, the products or services you will sell, and how you intend to advertise to prospective customers. Also, how much cash will you need to start up and where will those funds come from? These are important questions that you need to answer and address before starting your business. Keep this in mind: no answer, no business!
- Legal form. You can form a corporation, or operate as an LLC, a partnership, or a sole proprietorship. However, you need to consider both tax and non-tax reasons for selecting a given business structure. These means, you need to know your priority. Do you want to maximize tax deductions? Is the priority legal protection? Are you going to sell the business to a competitor in the next few years? Do you want to minimize your estate tax? Are you going to go public? So make sure you know the goal in mind.
- Location. If your business will consist only of online sales, then your corporate office can be wherever you are. However, if your business needs foot traffic to thrive, you'll need to research rents and other costs such as utilities, as well as zoning and traffic restrictions.
- Taxes. You'll have to work with the IRS, state tax agencies, and local governments to obtain permits and business licenses.
- Advisors. You need to create a business financial team that includes a banker, an insurance agent, an attorney, and yours truly, your favorite accountant. So make sure you involve your advisors early and frequently.
To recap, starting a new business can be very challenging, but by considering these five items, you can put yourself on the path of an aspiring business owner. Good luck!
If you like to learn more, click the link lowermytaxnow.com and sign-in to receive my weekly blog.
Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com.
Last Updated by Admin on 2017-02-08 06:22:39 PM