For years Harry and June have been making wine in their basement. It’s quite good wine; so good, in fact, that many of their friends routinely ask to buy a case (or three) to give away as gifts. After conducting some market research and drafting a business plan, Harry and June decide to start their own winery. Their only problem now is figuring out how to finance their start-up business.
Harry and June have enjoyed successful careers and have managed their money wisely. They have cash-on-hand, good credit, a sizable retirement portfolio, and plenty of equity in their home. But they really don’t want to risk their personal assets to fund this new business venture. So how do they raise enough money to pay an attorney to form their business entity, buy (or rent) a production facility, purchase (or lease) equipment, buy grapes, pay for insurance and licensing, and invest in marketing and advertising?
First, they look at their network of friends and family. While they’re uncomfortable asking them for money, they know that their Aunt Martha is well to do, cares for both of them, and really enjoys their wine! Martha’s husband Frank passed away some years ago, leaving her with a sizable fortune. She doesn’t have any children of her own, and has always been generous with them.
Maybe Martha would just give them the money they need to start their business? She’s mentioned several times that Harry and June are in her will. Perhaps she could just give them the money now and revise her own estate planning documents to account for a gift during her life?
“But wouldn’t that create a tax problem?” Harry asks.
Depending on the amount they need, it very well might.
Maybe they could ask Martha to invest in exchange for equity in the company? A capital contribution in return for shares in the company would be an easy way to avoid gift tax concerns.
“But Martha is a bit of a control freak,” June comments. “Do we really want her as a partner?”
Perhaps a loan from Martha would be a better way to go. She could give Harry and June the money in exchange for a promissory note.
“But what happens if the business fails and Martha isn’t repaid?” June asks. “Wouldn’t she be upset, and wouldn’t that create problems in the future? I love Martha and don’t want to ruin our relationship with her by failing to pay back a loan.”
After much reflection, Harry and June decide it’s best to leave Martha alone. They don’t want their relationships with friends and family intertwined in their business. They’ll find another way to finance their dream (Part II).