February 12, 2018 at 6:02 pm #160498
My husband needed money to become an equal partner in a small business with his friend/coworker. They both have been working in that business and last fall his buddy bought it over from the previous owner. Now they both want my husband to become a partner. For that he needs to bring in money and they agreed on both of them having $35k in the business.
I took a loan from my retirement account to fund this and now wonder what is the best way for me to protect myself and my money as well as from tax point of view (both business and personal). I have not received the loan check yet but it should be here any day now.
AliceFebruary 12, 2018 at 8:20 pm #161989
It sounds like you have a plan ready to go, but you should be careful about taking a loan out from your retirement account. Generally a Rollover for Business Startups (ROBS) works better because you don’t have any fees or penalties for not replacing that money. With a loan you’ll need to pay it back in full within 5 years or immediately if you leave the company that manages your 401k. With a ROBS you don’t have to pay any penalties or taxes.
Regardless, there aren’t a lot of options in protecting your money since your husband is investing it into a business as equity. You just need to make sure all the paperwork is drawn up and official that he is a full partner and owns the correct percent of the business (50% if that’s the deal). The company won’t owe you or your husband any money so there are no protections in that regard.
From a tax point of view you’ll need to make sure you fully understand how the business is taxed going forward, because if it’s a pass-through entity the taxes could fall to your personal tax return. That could be a good thing, but if they do you’ll need to make sure the company has a plan to help you pay for any tax liability that may come from that. Typically the business will make distributions to help owners pay for tax liabilities in pass-through entities.