How to repay a family loan to start a business
From a theoretical point of view, a personal loan can, indeed, be used to finance a professional project. However, the accounting treatment will be slightly different depending on whether it is a sole proprietorship or a corporation.
Reimbursement of a personal loan granted to a sole proprietorship
In the context of a sole proprietorship, family loans granted to “set up his box” are very common. Most of the time, they are not even the subject of an official statement (which I can not advise) unlike business-to-business loans.
Often, there is no trace of such “borrowing” at the level of accounting and these loans appear at the level of bank accounts as inputs from the operator himself . In this case, they are simply credited to account 108000 (the operator’s account).
Most of the time, they will simply be repaid, interest free and as time goes by, depending on the cash flow of the business. They are then seized to the credit of this same account of the operator (108000).
If there is such a “lax” treatment is that the levies of the operator do not trigger any taxation in a sole proprietorship . Indeed, let’s not forget that an individual business is always taxed on the profits generated (never on the levies of its leader). This lack of tax incidence may explain the relative “negligence” in the accounting treatment of personal loans in a sole proprietorship.
Reimbursement of a personal loan granted to a company:
In this case (which is yours), the situation requires much more formalism and rigor.
Indeed, from a legal and fiscal point of view, you and your company are two different people . This difference (often difficult to perceive when you are hyper majority or single partner) requires you to consider the assets and debts of your company as different from your wealth and your personal debts .
As a result, the absence of abnormally “tolerated” formalism in an individual company can not apply to a company. You will therefore have to prepare documents and bookkeeping to indicate and track these money movements .
However the treatment will be totally different depending on the time and purpose of this loan.
Your loan came after the creation of the company:
The company was already established and you have benefited from a personal loan to develop it. In this case, here again two possibilities may arise:
The lender is associated with the company:
If the loan has been granted by a partner to his company, this sum will be interpreted, most of the time, as a contribution in the current account. The operation of these contributions is generally defined in a convention known as the current account agreement.
The repayment of this current account is made according to the terms defined in this agreement (time, duration …) and interest is not deductible without limit.
What are the deductibility limits of current account interest?
The law makes it possible to deduct, for tax purposes, an interest that complies with the maximum rate published each month in the official gazette. To simplify the calculations, a quarterly average rate and an annual rate, based on the rate of banks for variable rate loans of more than 2 years, are published.
For information, here are the published rates for 2017:
- 1.82% in the 1st quarter;
- 1.67% in the 2nd quarter;
- 1.59% in the 3rd quarter.
If the company exceeds the limits (ie if it pays interest in excess of the rates previously indicated), the surplus will be reinstated in its taxable profits.
How will these current account interests be taxed at the partner?
These interests will be considered as movable capital income (RCM). They will be taxed as follows:
- if they are less than € 2,000, a flat tax of 24% will be applied.
- if they are higher than € 2,000, the 24% levy must be made by the company but it will only constitute an advance payment on the future tax on the “lender” taxpayer.
The lender is not associated in the company:
In this case, it will be a “classic” loan to a company that must be framed by a specific formalism. This new wave of “personal loan to companies” has recently developed thanks to the different crowdfunding platform . Nevertheless, it will be necessary to remain vigilant so as not to sink towards a recurrent and traditional activity which could be assimilated to a professional activity competing with that of the banks …
Your loan occurred before the creation of the company for the constitution of the capital:
In this case, which seems to be yours, this “loan” served to constitute the capital of your company (half in kind and half in cash).
Here again two possibilities can arise:
Contributors and contributions have been mentioned at the level of the statutes:
In this case, these lenders are, in fact, partners and their loans are, in fact, capital contributions.
However, the capital of a company will only very rarely be reimbursed to the partners. These repayments are known as “capital reduction”.
Indeed, if this is the will of the partners and if the cash of the company allows, there is a possibility to repay part of the capital to the partners by respecting certain conditions set by law (because the capital constitutes a guarantee of the solvency of creditors):
- respect the minimum capital (€ 1 for SARL, € 37,000 for public limited companies …)
- fulfill all other conditions (legal formalism, delay, advertising …)
This formality requires the intervention of a lawyer and/or your accountant and will generate a cost related to the various formalities and taxation:
- fees for accompanying and drafting statutory amendments,
- registration fees,
- change fee at the Business Formalities Center,
- publication fee in a legal newspaper …
Contributors and contributions have not been mentioned in the statutes:
In this case, it can not be considered that the contributors are partners. In addition, and as regards funds incorporated into the capital, it will not be possible either to consider them as repayable current account contributions.
There will be no other option than to consider that these are personal loans granted to the leader and that will have served, later, the creation of the company.
In this case, the repayment withdrawals can only be assimilated to the remuneration of the officer who is taxable and subject to contributions.