All money that comes into a business goes into one of three categories: revenue, purchase of equity, or a commercial loan. That’s it, there’s no such thing as a “gift” to a business (although grants are not uncommon here in Asheville). It’s important to keep good records for your investors, lenders, and the tax man whenever money comes into your business’ bank account. Those records should include, depending on the nature of the transaction of course, shareholder agreements or statements as to dividends that may be paid; commercial loan documents (called a “Note” or “Promissory Note”) detailing when and how the loan will be repaid including interests, amount of payment, when payments start. If you’re putting money into your business and don’t know which of these categories it should go into, call me to discuss getting your corporate records in order and putting the correct documentation in place to protect your businesses assets and income.
Another type of “loan” is the convertible note. This is common in tech businessses that seek investor money, but don’t want to give up equity at the early stage of their development, especially when it’s difficult to value the shares. This is an actual promissory note; but interest is usually deferred until a baloon date. If the note is not paid off by that date, the amount lent is converted into equity in the company at either a pre-agreed rate; or at a rate such as the most recent valuation. They can get complicated quickly, and I rarely recommend them because of this.
For this and all your businesses legal needs, call me in Asheville, Hendersonville, Fletcher, Waynesville, and all of Western North Carolina at (312) 671-6453, email at email@example.com, or for more information palermolaw.com.