Forums: Discussions for entrepreneurs and small business.

Hello everyone!

Business plan, check! Elevator Pitch, check! Investors, check! Now what?
I have successfully landed investors and now I have questions on what I need to know.  First, are investor funds taxable? Do you pay taxes on Investor funds?
Second, how often do I need to update investors with the progress of the company?  What should I expect as far as input from investors? Should I seek their approval for business decisions or should I just keep them updated on the progress according to the busines plan? Any advice would be greatly appreciated! I have more questions of course but I will leave those for my next post. Best Wishes!

Ken~

Ken,

Good questions. However, it`s difficult to provide specific advice on a general forum like this.

Generally, funds received from investors (equity or edbt) are not income to you. The rest of your questions should have been covered in the "deal" with your investors and will depend upon the relationship between you and them. Generally, lenders do not participate in the operations of the business. Equity investors may feel they should be involved -especially if they have a signigicant ownership in the enterpirse.

If you would like my advice about your specific situation, please contact me directly.

Robert Johnson

 

 

 

 

 

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Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

Congrats Ken!  Movin forward!  Great to see!  Start it up!

Hi Ken,

 Well interesting questions. The answer of course depends. The tax question is the funds are an investment so you will be using the monies to build business, advertise, expand, etc. Since the funds are not income no tax is paid.

I am assuming you are an incorporated. If you are not then get incorporated ASAP. This will limit your exposure and protect your assets.

Typically investors have no say on day to day goings on in the company as the amount they own of the company is not enough to grant them this ability.

Investors expect to be updated on profit loss typically every quarter, also they should receive some guidance for plans to react to the profit/loss statement such as how you are going to meet next quarters projected sales, etc.

Now if you are the investor they will probably write-off the investment or use it to get a break from the tax-man. If the investor made a profit then they would pay tax on any profits. I could go on and on… however I think you get the idea on what happens on there end.

Now the only thing you need worry about is if you have an investor that owns more of the company than you do… if that happens then obviously they can take control, kick you out. I think that is unlikely however something to pay attention to.

You can have a board and board members get a say in company decisions and often time the biggest stockholders demand or are given a seat on the board. However they don’t run departments, etc.

So as you can see it depends on how you are specifically setup what your articles of incorporation require as to the answer of the question.

I hope this didn’t make the waters more murky… good luck!

Eric

Thank you all for your responses. This does clear some things up for me.  If and when I have more questions I will ask them here. Thank you all again!

Ken

Ken,

I think it`s terrific that you have people who are willing to support your business.

The responses posted here are correct - assuming you have done the specific things to make them correct.

For example, money received for the purchase of equity is not taxable - provided the transaction is properly handled and documented. However, an improperly handled transaction can create a taxable event for you.

Robert Johnson

 

 

 

-------------------------

Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

robertj-

Now you have awakened my curiousity!  Could you elaborate a little more on what you mean by, "an improperly handled transaction can create a taxable event for you." ?  Thank you in advance.  I do have a stockholders agreement that I am making all investors sign before handing over any funds. Is that sufficient or should I be doing more to protect myself? I am looking forward to your response.

Ken~

If by stockholders agreement you mean a "purchase agreement" (properly called a subscription agreement) - that`s an important item.

If

1. You have set up a business entity (Corporation, LLC, limited partnershipe, etc) and

2. All funds went to the entity (not to you) and

3 you completed the transaction by delivering "ownership" documents to the investor

You are in good shape.

I have seen many folks who either accept the cash/capital directly or get the above out of sequence.

Now that I`ve peaked your curiosity - you should also be sure you have documents in place that clearly spell out the investors relationship (rights and privileges) with the entity.

 Robert Johnson

 

-------------------------

Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

Ken,

 I think if you are asking this question chances are you have not complied with Reg. D.  (Regulation D- lots of different types of Reg. D exist  and limit the maximum amount you can raise, for a limited time, things like advertising, tradability etc, etc… trust me boring stuff)

How sticky this becomes depends on the number of investors and the implied rights (or the rights they think they have in lieu of a written document.)

 

If your investors are strangers, who invested on strength of business plan etc then you will want to get everything in order ASAP.

 

If they are friends and family you more than likely have more time to get everything in order.

 

To be completely honest with out knowing the specifies of the transaction it’s hard to judge the legality.

 

You could probably consult someone who has a background in this area and go over the specifics in about 3 minutes at the end of the conversation you will know if you need professional help, you are okay, or if you can complete the undone items on your own.

 

Take care,

 Eric

 

Eric and Ken,

Actually Reg D may not be involved at all. While it is important to comply with the appropriate securities laws and regulations - especially if there will be future equity capital required, I feel it is just as important to have a clear understanding (written) with the current investor(s).

I`d say it is more important if the investors are friends or family to get things "clear" ASAP. For example, we see many situations where the "investor" really thought they were providing a loan and expect to be repaid.

Robert Johnson

 

-------------------------

Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com