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Say I work in the US and am using my personal earnings to bootstrap a small company. What is the proper way to transfer my personal wages into the company account?

Do I just cut my company a check? If I understand the accounting, each check would count as another investment in the company and would count towards my total vestment. Would my company then have to pay taxes on my investment of after tax dollars?

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In general, you can provide cash to your company in two different ways: as an equity investment or as a loan.

In either case, you should write a personal check to the company, and then the company will deposit the check in a company-owned bank account. The company should also issue a written instrument documenting your investment (see below).

If you are making an equity investment ("buying shares"), the detailed mechanics depend to some extent on how the company is organized. In general, the company will credit your capital account for the amount of the investment. However, if you have multiple owners, you may need written corporate resolutions permitting you to make an investment; you will be issued shares according to the value that you have established for the company. Your bylaws or operating agreement should spell this out in detail.

If you are making a loan, make sure that the company signs a note that details the interest rate that the company will pay you, and the payment schedule. In this case, you don't receive any extra shares. Be sure to use a fair-market interest rate, and that the company makes interest payments to you as scheduled.

As a special case of a loan, if you are close to having cash flow that will cover the expenses, you can pay for some expenses with personal funds and then submit an expense report to the company. When the company makes a sale and has cash to reimburse you, it will cut a check to you to cover the expense report(s) that you have submitted.

With respect to the question about the company paying taxes on your investment: the simple answer is no, since your investment is not income to the company.

If your investment is as equity, there might be no immediate tax implications -- but there may be longer term implications, for example if you were to sell the company or liquidate.

If your investment is as a loan, the company will record the interest paid to you as an expense, which will reduce profits and thus should reduce the amount of tax paid by the company. The interest you receive from the company would have to be reported as income on your personal return.

Of course, if the company is a pass-through entity (S-Corp, sole proprietorship, etc), then the company doesn't pay Federal taxes (and maybe not state). The owner(s) report earnings on Schedule C and pay personal income tax based on that. What happens at the state level is a mess, every place is different.

Bottom line: A quick chat with your accountant will give you the best answer for your specific location and situation.

  • Could you also highlight if the investment is as Shares, then it would not be taxed again to the company. It would be an asset. The taxation would be based on Profit & Loss and not on asset. Similarly if its a loan, it would not be taxed to the company; also the interest it pays you will not be taxed at company, it would be treated as expense. However the intrest in your hands would be taxable as personal income to you. – Dheer Feb 23 '11 at 15:29
  • @Dheer - Yes, thanks for reminding me that I forgot to answer that aspect of the question. – bstpierre Feb 23 '11 at 15:48
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Debits and Credits. Since the company sold you a share for your cash you each "gained" in the transaction. As income for the company it is taxable.

Now it depends on what you spend that money on. If you buy things that depreciate straight away, then it counts as a taxable loss. If you buy capital items (property, immovable assets) which depreciate over a number of years then you'll be paying tax on that investment.

However, check your local tax allowances (and hire a good local accountant to help you). There are often special depreciation allowances and investment promotion/R&D rebates which you can take advantage of. It depends on the industry as well.

If, on the other hand, these are small allowances to cover operating expenditure (like rent, services) then you may want to pay that directly yourself as a loan to the company. That way it is automatically a debt the company owes you and must pay back to you at some stage.

If you write an agreement that this debt may be exchanged for preference shares in lieu of repayment then you'll be able to convert debt to equity at a future date.

In all things, though, seek professional advice to ensure that you are in 100% legal compliance.

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    "As income for the company it is taxable." -- not really. Unless I'm misunderstanding the question, this should not be accounted for as income. It should be accounted for as an equity investment in the company -- a balance sheet account, not an income account. – bstpierre Feb 23 '11 at 0:02
  • Sorry, I should have been clearer. Too busy watching Libya. The financial transaction is separate from the documentation. As long as you have clear documentation in the company journal that the money is an investment then you can document it in the accounts and balance sheet. Simply placing it in the balance sheet won't be sufficient. – Turukawa Feb 23 '11 at 6:25

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