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I've started a company with a friend, and we're looking to find out how to transfer some of our money into the company. Several sources suggest that, since we're the only owners so far and there's no point in issuing more shares yet, our best bet would be to provide the money to the company as loans. Is this correct? Is there a better method we could use?

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It will depend somewhat on the rules where the company is formed, and perhaps how much you're talking about investing. I don't know about Canada, but when I've formed businesses in the U.S., I've been advised to invest some of the money as an equity investment, and the bulk of the remainder as a loan. You say "more shares", so it sounds like you've already invested some money and need to inject another round.

If you make a loan to the company, make sure everything is done at arm's length -- you'll need to wear the hat of the Company Management and sign a contract with yourself, use a market-based interest rate, and make sure the company is paying you back with interest.

An alternative which may work if you expect cash flow soon is to pay for certain expenses personally and then submit an expense report to the company, which will pay you back.

Overall, a quick consultation with your accountant should be a relatively inexpensive way to get the best answer for your specific circumstances.

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Ask your accountant about convertable preference shares. This would permit you to loan money to your company and then convert the debt to equity, should you so choose, at a later stage. As with the answer by bstpierre, these are all contractual arrangements conducted at arms-length.

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