Starting a Business - General Question

[Piku Nanda]

Hello All,

I am starting out a retail business with my life's savings (around 300k). Since this business does not have any property or equipment, I cannot get a business loan (and hence using my savings). I wish to show this initial investment as a LOAN to the business which I will get back over X years with X.X interest. I understand that if I do so then the interest income will be taxable BUT my principal will be returned to me without tax penalty.

My questions:

1) Is my above understanding correct?

2) Who/What will I need to pull the above off as I start my business (does a CPA help with this ? Business attorney ? Or Do I just have to do something at my end )

If anyone has any experience with this situation, please share your insights.

Thank you,

Piku

[Ashish Acharya]

@Piku Nanda , 

Contracts on taking this huge step in your life. I am glad you are reaching out now compared to once the transaction has already taken place. 

Although there needs to a detailed discussion on what business, who are the partners, and your goals, some general issues need to be addressed. 

1) Showing initial investment as a loan to the business does no good. You have to manage a debt relation with your business and it is just a hassle without any benefit. Also, why would you want to get taxed on the interest income?

2) if you just contribute the capital as your contribution/capital to your business, you are not going to taxed on that capital. Looks like your concern is that you are going to be taxed did you dont loan to the business. 

3) You can always withdraw your capital from your business without any tax. 

I would talk to an attorney if you are doing a partnership to draft a good agreement and with a CPA to get a best out the taxable entities to do your business. Choosing between C-corp, S-corp or LLC might have a huge impact on your taxes.

Let me know if you want to discuss further.