Where would I put this investment?

[AnnaF]

Hi All

My client is a ltd co with two directors and one shareholder. There is a 3rd party who wishes to invest in the company. He is not a director or a shareholder and he pays xx per month to the company as his investment. He expects in the long-term to get some profit from the company when it is sold.

So do I put this as equity (I don't believe it is income) or as some kind of loan?

Thanks in advance for your help.

AnnaF

[Zeno]

You will need to provide more in the way of detail. If he has not purchased shares of any kind then it is not equity and can only be some sort of loan but how this can lead to any sort of profit share I don't know.

Sounds like a recipe for disaster if there is no paperwork drawn up suppoting this.

[AnnaF]

Hi Zeno
I share your fears. However, these people have known each other for a long time. And the idea is to set up another company in the future together. So the "investment" is to show a commitment to that venture without the investor having a stake in the first business.

I do know that this is a very good software product and all involved are aware of the risks of no shareholding and are happy to have this arrangement in good faith. So all I have to do is account for it - so a loan would be the way to go?

Thanks again
AnnaF

[bwglaw]

It could be construed as a gift in the absence of any agreement to loan. A qualified Accountant would be able to confirm how this transaction should be treated from a tax perspective, however, other have touched on potential legal issues which you seem aware of.

[KM-Tiger]

However, these people have known each other for a long time.

There's an old saying: "The closer the friend, the tighter the contract".

Even if they draft it themselves, something should be down on paper.

[AnnaF]

Hi Guys
Thank you all for your replies. Very Useful.
AnnaF