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I've been working on a startup since Jan. 1, 2009. To keep me alive (physically on a ramen diet) my parents give me $1-$2k per month. My company is set up as an LLC and my parents would like to consider the money they are giving me as an investment and structure it as Convertible Debt. I simply take that money and use it to pay my living expenses. My question then becomes - do I have to pay income and payroll taxes on this money? Any advice is helpful. Thanks!!! |
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You don't pay income tax on loans. You don't pay payroll taxes on it either. What you need to do next is find an inexpensive lawyer to draw up the paperwork. Because this is a red-flag transaction (parties are close), you need to make it clear that this is an arm's-length transaction. But you can use an inexpensive lawyer because it's cookie-cutter and the parties are friendly! |
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As noted in the first answer, taking out a loan is not a taxable event. Nevertheless, in addition to having a lawyer draw up a convertible loan agreement, you should consult with your tax advisor so you can anticipate and avoid any potentially undesirable tax consequences down the road if and when a conversion from debt to equity takes place. Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship. |
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The problem is that the money is supposed to go to your LLC, but then you obviously are using it to cover your living expenses. How does the LLC give you the money? You could be an employee of the LLC, for instance. That's when taxation would come into play: payroll taxes and income tax. I don't think there is a way for you to pocket that money without paying any taxes on it. Otherwise, everyone would be doing it. |
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They can give you up to $10,000 each tax free as a gift. (that number may have gone up). Let them give 9,800 each per year to you as a gift and pay personal income taxes on the rest. Then either grant them stock or options or convertible debt on the rest. If you are using the money to "pay" yourself you are supposed to declare it as income. And they need to show "consideration" for their investment for it to be truly an investment. Even if it is only $200 per month. At least that is the way I understand the tax code but I am not an accountant or a lawyer. Just an entrepreneur. Personally I think placing a value on a company, even at the beginning is always best and most fair. The early investors take the most risk and should get stock at the best value. If they have to wait until an angel or a VC puts a value on it, they effectively get penalized by that valuation, typically higher than the value at the early seed stage. I try to avoid convertible notes both as an angel and as an entrepreneur. |
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