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USTaxAdvising
USTaxAdvising, Accountant
Category: Finance
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Experience:  Professional with finance related questions.
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I own an LLC Sole P. I want to make a smart decision. If my

Customer Question

I own an LLC Sole P. I want to make a smart decision. If my company brings in $1m, and has deductibles of $750k and I have $250k left - what would be the smartest way to loan a start up company $50k as another revenue stream? I have taken $75k as Salary
and $75k as distributions. Please give me some advice. Id there a chance I get double taxed if I do this the wrong way?
Submitted: 1 year ago.
Category: Finance
Expert:  USTaxAdvising replied 1 year ago.

Hello,

It really depends on what type of business you are investing into. Generally speaking if you are looking to invest in a start up company then a purchase of shares would most likely be the best method of acquisition.

Generally I see venture capital funds invest into start up companies via a "convertible debt instrument" (which is really just a note payable that is convertible to common shares at a certain date).

The instrument details that the debt is convertible into shares at a certain share price and is generally discounted to give a priority to the note holder. The debt instrument also generally has an interest charge included so that interest is also payable on the debt or payable when converted.

I think this is really the best way to invest in a start up company as you are given priority of repayment if the company ever goes bankrupt. Note that creditors are paid back first in a bankruptcy, shareholders get what ever is left over.

I hope this provides some guidance and clarity that you were looking for.

Best regards,

PS here are a couple of good links I just found on the subject:

http://www.bothsidesofthetable.com/2012/09/05/the-truth-about-convertible-debt-at-startups-and-the-hidden-terms-you-didnt-understand/

http://www.seedinvest.com/blog/pros-and-cons-of-convertible-notes/

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