Accounting · Finance

Invest or loan in your own corporation?

Abhishek Sharma Founder - Genex Move

May 13th, 2020

I am planning to put some money into my company account. I know I can term this as "investment" or "loan". Let us say this amount, for now, is $2K.
I am trying to understand the steps in this transaction. So for example:

  1. Keeping a record of cash credit in the company account.
  2. Do I need to come up with a new contract between the corporation and myself about this transaction? Like if I call this as an investment.
    and so on.

I want to be sure I am following the right steps. I am in an early phase and do not an accountant. Looking for helpful responses.Thanks

Prateek Shukla Co-Founder & CEO @Altorum Leren

Last updated on May 14th, 2020

Every company usually at initial stage requires working capital and infusion of the amount from the business owner is common.

If your company is a PVT Ltd company, I would suggest that you convert this loan into equity by passing a resolution in the Board meeting.

Since, its not a big amount and you think that you'd be able to repay the amount after a certain amount of time, you can show this as Short term loan in your Balance sheet and once the company gains funds, you can repay the loan.

Suggestion - It is always very much required to keep your financials proper so that you do not face audit issues and also when you reach out to potential investors, they are always going to grill you on your accounts.

Varne Jones Founder and CEO @ Trust Business Intl

Last updated on May 13th, 2020

The motive behind any investment is to attract profit. In doing so, one has to weigh the kind of investment to get involve with in terms of profit margin, cost of investment, and risk and liability as well as the cost of periodic taxation. If the result of your investigation proves a good profit margin, then I advise you do a direct investment to improve the company. And I further advise that you sign a new contract with the company.

Dane Madsen Organizational and Operational Strategy Consultant

May 13th, 2020

This is common in the US for tax purposes - and called a "partner loan" if you are an LLC. A 'partner" can write off the amount they have at risk but are subject to recapture in the future. It does shield early income from taxes as repayment of the loans. No contract is required. No idea how it is in Canada.

Always keep pristine records - it no only helps on this issue, but for the forecasting going forward.