Re: Interest paid to equity partners?
- From: "GrandMarquis99" <GrandMarquis99@xxxxxxxxx>
- Date: 5 Sep 2006 15:52:32 -0700
This can be done, but you have to get good counsel and make sure that
you paper it 9 ways to Sunday in all the right ways (and in none of the
wrong), otherwise your "debt" will just get recharacterized as
disguised equity, which will most likely bring along with it penalties
and interest.
It would be best if this "debt" wasn't pro rata in accordance with the
equity investments, but it almost always ends up being that way (non
pro-rata that makes a difference will often break the symmetry that is
one of the primary reasons for recharacterizing the debt). Also, the
"debt" has to be real debt - the sort of debt that your typical greedy
little non-equity investor would be willing to hold in the real world -
that means realistic interest rates, realistic payment schedules,
realistic events of default, realistic creditors' remedies, and
payments must, must, must, be punctiliously made and not waived. I am
going a little overboard emphasizing these things, but the fact is, if
you're at all slip-shod about these things, or if it's really a
nudge-nudge-wink-wink situation on making actual cash interest and
principal payments, you will get slammed.
Paul Thomas, CPA wrote:
"Larry" <clark.cpa@xxxxxxxxxxxxx> wrote
Hi. I have a client with investors who want to be owners (probably an
LLC so they would be members). Managing member would like to pay
interest to the investor/members based on their equity amount. He will
also pay them a share of the profits. A bank has agreed to loan the
funds needed in the company, but owner/manager would rather pay the
interest to the other owners. He needs the interest to be an expense,
since the share of profits paid to them are actually combined with the
profits from another unrelated company (sort of a joint venture). Any
suggestions? THanks in advance!
You can't pay interest on equity investments. And the IRS will probably
catch on that there isn't an underlying debt instrument.
Consider structuring things such that a portion is equity, and the remainder
is debt to the partnership (the individual loans $ to the business. Have
valid notes that carry market rates of interest and make payments according
to the loan schedule. Of course, each individual would have to report
interest income, and the partnership gets an interest expense deduction. In
theory they wash out, but at the individual level they may not.
--
Paul Thomas, CPA
paulthomascpapc@xxxxxxxxxxxxx
.
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- From: Larry
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- From: Paul Thomas, CPA
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