If you have an adult child asking you for investment capital to launch a new business, you may be strongly tempted to comply. It might be a good investment, or it might not. Either way, an article in The Wall Street Journal points out several things you can do to preserve both your capital and your relationship.
- Understand that most start-up businesses fail within the first few years, so there is a good chance that your “investment” will not pay off, or if it does, it may take longer than you expected. Decide now whether you are making a gift with no expectation of getting your money back, an investment for an equity position, or a loan at a favorable interest rate. There is no single right answer, but make sure everyone is on the same page about the nature of your investment. Also, be sure to consult your attorney about any gift- and estate-tax implications.
- Get it in writing. Families often “forget” this important aspect of any financial deal, but it’s important for both sides to put the terms in writing to prevent misunderstandings down the road. Remember, if you want to preserve both your money and your relationship, a written agreement is your friend. For this type of family transaction to pass muster with the IRS you must structure it as if it was an "arms length" transaction that any lender would willingly offer an unrelated borrower.
- Treat your child like an adult. Don’t become a nagging parent, rather try to foster an environment that encourages your child to come to you with open, honest communication. Allow your adult child to run the business without unnecessary interference.
- Give advice as needed. It’s a fair bet that your child has never run a business before; in fact, he or she may not have much business experience at all. Consider taking an advisory role, and don’t be surprised or indignant if your first-time CEO makes a few rookie mistakes.
- Examine your own motives. Make sure you are providing funds to help the fledgling business rather than using money to buy your kids’ love.
You can learn more about this topic as well as other strategies on our website under the tab entitled: business planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate plan-ning.
Reference: The Wall Street Journal Online (June 7, 2011): For You, Graduate, Some Start-Up Capital