When companies hit hard times, owners often reach into their own pockets for cash infusions into their businesses. Unless those infusions are carefully documented as loans, owners' funds may be irretrievably lost if the business is eventually forced into bankruptcy proceedings.
To avoid that risk, Richard Bruder, a law partner with Seyburn, Kahn, Ginn, Bess, Howard & Harnisch, in Southfield, Mich., recommends these strategies:
* If you're in a cash crunch, document all your cash infusions as secured loans. This requires three legal documents: (1) a promissory note, signed by your company, the borrower, that details the amount and date of the loan as well as payment terms; (2) a security agreement, also signed by the company, describing the assets against which the company grants you a lien as collateral; (3) a UCC-1 financing statement -- to be filed with your secretary of state -- which formally establishes a record of your lien.
* If you're in a growth mode, tie your cash contributions to specific asset acquisitions and then formally secure the loan with a lien against that new asset. "If you can demonstrate that you've personally provided the funds to acquire a new asset, a security agreement can give you the first lien against it," says Bruder. Remember also to back up the loan with a promissory note and a UCC-1 filing.
If a company is in a cash bind, Bruder advises that owners not pay themselves salaries when they know they'll only have to lend that money to the company. By forgoing salaries, they can avoid incurring immediate payroll-tax obligations. Instead, owners should document and secure forgone salary as a loan to the company. That will, at a minimum, defer the tax on that money and possibly reduce combined taxes paid by the company and the owners. -- Jill Andresky Fraser