Re: Tax considerations in financing business

From: "Steve Foulks" <steve_foulks@up.bresnan.net>
Subject: Re: Tax considerations in financing business
Date: Wed, 11 Nov 1998 00:59:21 -0500

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>From: "Melinda Johannes" <mbjohannes@hotmail.com>
>Subject: Tax considerations in financing business
>
>I've got the cash necessary for my startup, but am considering
>different ways to fund my business.
>
>I can either pay in the capital, just transfer the cash from my
>personal accounts to the business books in exchange for owner equity,
>or I can loan the S corp the cash, in which case the business can
>take a write off for the interest expense, and I'll claim interest
>income on my personal return, right?

Assuming you are going to establish an S corporation, then the lending
approach is meaningless.  Because an S corp. is a tax "conduit" (i.e., it
tax attributes flow directly to the owners) the interest you earn from the
loan will be offset by your share of S-corp separately stated interest
expense.

>What other considerations are there in determining whether to
>loan or "give" my new business capital?

Your question should be,  "How should I best organize my business from a tax
(or wealth maximization view)?" Should I use an S, or C Corp, a sole
proprietorship, a LLC (limited liability company), a trust, etc.?  There is
no easy answer.  It is a function of your particular context and your view
of the business future.  You need to consult a local CPA who is
knowledgeable in business formation tax issues.

Steven M. Foulks, CPA, CFP       
Professor of Accounting
Northern Michigan University
http://www-instruct.nmu.edu/business/sfoulks/


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