Friends and family loans can be great resources to help your business start and grow. But there are the obvious pitfalls of dealing with family when it comes to money and your business. The main thing I advise my clients on when taking money for their business from F&F is from the get-go to be clear, separate family issues from business issues and keep them separate, and get every agreement in writing: are the funds a loan, or a purchase of equity; what kind of input will you allow the F&F to give to your business; what’s the exit strategy, if any.
Warning About Friends and Family Loans
However, friends and family loans have been the demise of many a business and relationship. Your Uncle Bob that “gave” you $100,000 to expand your business may not have heard you ask for a “loan” but thought instead he was buying a part of your business. When the business is sold, or when you hopefully have the funds to pay him back, he may wonder why he isn’t sharing in the profitability of the business instead. An unpapered loan can also create havoc when a family lender dies. How does the estate handle the money you owe them, and how does it even know about it? That’s money his heirs are entitled to, but if the note is not in Uncle Bob’s papers, they may not find out about the debt when probating his estate.
Alternatively, if Uncle Bob was telling his family that he “owned” part of your business, his estate and heirs may show up at your office looking for their “shares” of the business, including profits that they may perceive you weren’t paying to Uncle Bob all this time. You can imagine the Thanksgivings I’ve heard about in some of these situations.
Contact me if you have any questions on business transactions. In western North Carolina, Asheville, Waynesville, Hendersonville at (312) 671-6453.
Email me at: palermo@palermolaw.com.
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