Family invested money into business

[MRPLOW]

I have a client that started an LLC and is developing a product. Various family members gave her sums of money (totaling about $75,000) for the product development. It does not appear to be loan as they are all OK if the product tanks and they get nothing back. NO formal paperwork. It has not been discussed how much they will get and/or profit if the product takes off and is sold for a large sum of money.

I'm a little unsure of how to classify/account for these payments. Any thoughts?

[spanel]

Im not sure that you do anything with the money invested currently (that would go on the LLC books). That being said, who gives someone (family or otherwise) $75k with no paperwork, expectations, share of company, etc? I'm going to go out on a limb and say basically no one. They are not telling you the entire story here.

Chris

[ATSMAN]

I ran into a similar situation between Father and Son few years back. Father gave son close to $50K to help him develop some invention. There was no paperwork and no expectation that the father would ever see his money returned or a share of profits if the invention panned out. I told my client to treat it as a gift and prepared a gift tax return.

[MRPLOW]

7 different family members each gave/invested $5,000, $10,000, and $15,000. I have the cancelled checks. And this is a technology product being developed, with the hopes to sell after it has been completed in 2020. Most/all of the money has been spent on expenses. Have known T/P's for 10-years, and all seems on the up and up.

And the T/P plans to pay back with the proceeds + an undetermined profit, if the the product is a success. If not, no payback.

[Burke]

Without any documentation/contract/paperwork, this transaction appears to be a gift by each party who paid in capital, unless they are legitimate members of the LLC on the documents filed with the state when it was formed. (Or later added as such.) The TP may have good intentions, but there is no legal obligation here by anyone unless your state honors oral contracts. Which can be messy.

[EvenKeelTax]

Is it too late to call that money purchase of shares of stock in the S-Corp? You know what each family member paid with the cancelled checks. I actually don't know that answer I am hoping someone else can give perspective as to if that actually could be done at this point.

[ATSMAN]

.Is it too late to call that money purchase of shares of stock in the S-Corp?

"NO formal paperwork. It has not been discussed how much they will get and/or profit if the product takes off and is sold for a large sum of money."

Not sure how it works in your state but in my state there are detailed registration requirements with the Secy of State for Corps. And I would not even advise them to go that route if that was NEVER their intention. If they want to do that I would strongly recommend they get legal advice from a business lawyer.