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J.Hazelbaker
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I am starting a small business. I will be in a partnership

Customer Question

I am starting a small business. I will be in a partnership with another person and we will form a LLC. We will need some equipment and because of the tight credit market I plan to use personal savings to finance part of our start up costs. I can either transfer funds to the LLC in the form of a personal loan, or I could buy the equipment as a sole proprietor and let the LLC lease the equipment from me. What is the preferable strategy from the prespective of best business practices and tax liablity. thank you





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Submitted: 4 years ago.
Category: Business Law
Expert:  J.Hazelbaker replied 4 years ago.
If you own the equipment as a sole proprietorship and lease it, you retain potential legal liability should anything happen (e.g. the equipment injurs someone or damages something).

If you loan the money, you eliminate this potential liability. In addition, you can secure the loan by a lien on the equipment by filing a UCC1 financing statement. See the following link for the Colorado forms for doing so:

http://www.sos.state.co.us/pubs/business/ucc_forms.htm

Please let me know, if you have follow-up questions.

J.Hazelbaker, Attorney
Category: Business Law
Satisfied Customers: 4385
Experience: Experienced and trained in the area of business law.
J.Hazelbaker and 5 other Business Law Specialists are ready to help you
Expert:  J.Hazelbaker replied 4 years ago.
Tax liability:

If you loan money, you will be taxed on the interest.

If you lease the equipment, you can depreciate it and receive the tax deduction. This can offset your lease income. You can then sell the property at the end of the lease period.
J.Hazelbaker, Attorney
Category: Business Law
Satisfied Customers: 4385
Experience: Experienced and trained in the area of business law.
J.Hazelbaker and 5 other Business Law Specialists are ready to help you
Customer: replied 4 years ago.
youre answers are very informative, but I must admit to being a bit confused. What I am simply trying to do is buy the equipment I need to get my business started. Since I am 50% owner in the LLC, if I charge interest on the loan I am essentially charging myself the interest. Also if I charge lease payments to the llc, I am also paying those lease payments out of my potential income. So I guess I don't understand why I would want to either charge myself interest or lease payments. Please clarify

Thanks
Customer: replied 4 years ago.
youre answers are very informative, but I must admit to being a bit confused. What I am simply trying to do is buy the equipment I need to get my business started. Since I am 50% owner in the LLC, if I charge interest on the loan I am essentially charging myself the interest. Also if I charge lease payments to the llc, I am also paying those lease payments out of my potential income. So I guess I don't understand why I would want to either charge myself interest or lease payments. Please clarify

Thanks



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