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Is it legal to give a business an interest free loan?

 
 
Reply Tue 27 May, 2003 03:33 pm
If not what is the minimum interest rate that must be attached to a loan?

My boss has been loaning our company money until sales pick up and I need to find out if we are legally obligated to pay him interest.
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Type: Discussion • Score: 1 • Views: 1,792 • Replies: 12
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Sugar
 
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Reply Tue 27 May, 2003 03:42 pm
This may be naive of me, but I believe the interest rate would have to be decided by a written agreement. Otherwise, it would be understood, even by a courts standards, that the loan is expected to be paid back, but not with interest. He would also be admitting that he would be gaining a profit on the loan and would have to claim that on his taxes. And you could claim the interest paid on the loan...but that's a whole other rat hole you may both want to avoid.

If he wants interest then he should have you sign a contractual agreement. Again, I could be wrong. I just deal in cash and then deny, deny, deny.....Wink
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husker
 
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Reply Tue 27 May, 2003 03:44 pm
Are you public or private?? If he's the main shareholder he can do just about anything he wants.
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husker
 
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Reply Tue 27 May, 2003 03:47 pm
Think of it as his way of giving back his equity to keep the company afloat until things pick-up. You should email me some financials and I can take a peek???
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husker
 
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Reply Tue 27 May, 2003 03:48 pm
make you feel better I have an excel speadsheet that you can plug the number into, but then if loaning his equity to the business the financials are not great to start with. Has he been to the SBA? Have any lines of credit?
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husker
 
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Reply Tue 27 May, 2003 03:49 pm
Oh yeah! don't be telling me yer leaving the country! Wink
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Craven de Kere
 
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Reply Tue 27 May, 2003 03:58 pm
Sugar,

My boss does not want interest. But we are concerned that his repeated loans are governed by some law or rule.

Husker,

It is not a publically owned corporation. And no, I will not email you financial data. :-) The question does not require confidential information to be divulged to be answered.

---------------------

In short, we are just wondering if it's legal for the president to do this. He is no longer the owner of the company but is loaning us money to keep us alive until sales kick in.
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husker
 
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Reply Tue 27 May, 2003 04:09 pm
Ok - but maybe there is a side deal going, you might not have all the details about the sell-off-out. He might have a covenant about revenue(sales) levels.
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Craven de Kere
 
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Reply Tue 27 May, 2003 04:27 pm
Husker,

There is no sell out or shady deal. I am requesting this information FOR him. There is no "deal" at all. The boss, who is wealthy, simply wrote large checks to our company and we want to know if we have to pay him interest. Neither the company nor the boss would like to include interest but we are wondering if it is legal to do so.
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Phoenix32890
 
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Reply Tue 27 May, 2003 04:37 pm
Craven- I don't know for sure. All I know is that the company my husband worked for (which is a huge private financial organization) often gave their employees interest free loans for things like down payments on houses.

It might be wise to check, but I cannot imagine a law forcing someone to charge interest, if they don't want to.
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realjohnboy
 
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Reply Tue 27 May, 2003 05:46 pm
Craven...It's a pleasure to respond & meet you "in person."
The answer to your question is, I believe, yes. Yes, it is "illegal" to have an interest-free loan. The problem and the agency you run into with no-interest or below-market interest loans is the IRS. I won't go into any detail but there is ample opportunity for abuse if someone is so inclined. Particularly in closely-held (ie family) businesses, income can be shielded from the tax-return of the higher bracket payer etc...
The good news is that interest rates are incredibly low right now. My money-market account at my brokerage is earning less than 1% a year, so you should be able be to get away with that. The IRS doesn't look at hypothetical investments your patron MIGHT have made but rather where the money came from.
Disclaimer: This advice is worth what you paid for it. -realjohnboy-
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Craven de Kere
 
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Reply Tue 27 May, 2003 06:20 pm
Thanks everyone.

CI provided a link that elucidated a bit. It seems I'll have to look into it further (or rather my boss will, I don't care that much as I do not deal with money ).
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au1929
 
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Reply Tue 10 Jun, 2003 04:30 pm
Craven
I can't imagine what law there would be against loaning money interest free. On any loan the lender sets the interest rate, if he wanted to set it at O who would complain.
Let's say he set it at. 0001% would there even be a question. There may be legal maximums but there are no legal minimums.
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