Do you think it is a good idea to invest in your best friend’s business? You may have been friends for years or known him for a really long time; but how can you be sure this decision will not boomerang? Investing in another person’s business is a huge decision and one that must never be taken in haste. You need to weigh the pros and cons, evaluate all the risks involved, and consider the potential rewards. Whatever the decision, you must not jump on board without considering these arguments:
- Select investments carefully: The first rule to doing this right is to choose your investments wisely and not follow someone else’s advice blindly. You must identify your own financial goals first before you invest your hard-earned money anywhere. Without goals in sight, you cannot assess an opportunity correctly; you will become vulnerable to any sales pitch. Trade investment options is a better option for successful investment. Read through the trading apps test reviews if you wish to trade successfully.
- Ask for a business plan: Before putting your money into any business you should insist on looking at the business plan. This will typically highlight the goals of the enterprise and offer you enough insights to help you understand whether the business is viable and will fetch your profits if you choose to invest in it.
- Assess your downside risks: This means looking at all possible outcomes for the business; whether it will fail or succeed, ascertaining how much is required for a break-even, where to get emergency cash if needed, and if you are willing to offer additional monetary assistance if the situation so demands. All these carefully-considered questions will help you realize if you are at risk of losing everything that you will invest.
- Get proper paperwork done: You must ensure that all your papers are in order, even if you are putting in your money in a close friend’s business. It is your duty to verify if any of your investor rights needs to be included in articles of incorporation for them to be valid. In case any asset has to be used as collateral like a patent, copyright, or trademark, all security interests should be properly filed with the correct federal offices. If you are planning to invest quite a large amount in the business, you should ensure you can access the company’s financial reports.
- Look at the tax angle: This is an extremely pertinent factor when you are thinking of investing in someone else’s company. You need to ensure that you get some tax benefits in case the business does not succeed. When your investment has been accepted as a loan, you must remember that any loses to business will be treated by IRS as non-business losses. There may also be an issue regarding taxation on profits that have not been distributed. When it is a pass-through entity, you are liable to be taxed on your taxable income regardless of whether any cash has been given to you.
- Keep copies: You must always have duplicated for every official document, like minutes, bylaws, shareholder agreements, articles of incorporation, etc. It is also imperative to maintain copies of all tax filings with the IRS and Secretary of State, and store originals of loans in a secure place.
- Never invest more than you can afford to let go: This is a basic rule for any investment because investments in smaller companies are often illiquid. So, even if the company continues to perform well, your money can be tied up until the time there is a landmark event that frees it up.