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Why Should I Increase the Share Capital Instead of Making a Loan to My Company?

Companio does not support corporate loans from the members of the business to the company. In this FAQ, we explain why, and what is the correct way of adding funds to your business.

Lending personal funds to the company may seem like a quick solution to obtain additional funds, but it can entail several disadvantages and significant financial risks. Here's why increasing the company's share capital is a much more beneficial and secure alternative:

Financial Responsibility and Risk:
- When you lend money to the company, this loan becomes a financial obligation of the company to you as the lender. This means you become a creditor of the company and are exposed to any financial risks the company may face in the future.
- In the event that the company incurs losses and struggles to meet its financial obligations, your loan becomes an additional burden for the company, which can impact its financial stability and ability to operate effectively.

Accounting Treatment:
- Loans provided by shareholders or board members are recorded as liabilities on the company's balance sheet. This means they will appear as debts in the company's financial statements, which can affect its solvency and financial credibility with third parties, such as external investors or lenders.
- Additionally, if the company experiences losses at the end of the fiscal year, it may result in the write-off of outstanding debt, meaning you could lose the lent money without recourse.

Tax Implications:
- Loans extended to the company may have tax implications for shareholders or board members, especially if they are deemed as disguised dividends or imputed income.
- Conversely, increasing the company's share capital through new capital investments does not entail the same tax implications and may provide additional tax benefits for shareholders, such as tax deductions or benefits on the sale of shares.

Transparency and Credibility:
- Increasing the company's share capital through new capital investments is a transparent and legitimate way to obtain additional funds. This demonstrates a solid financial commitment and confidence in the company's future, which can enhance its credibility with potential investors, business partners, and customers.
- Conversely, relying excessively on personal loans may raise questions about the company's financial stability and risk management, which can deter potential investors and impact its reputation in the market.

What is the best alternative?

In summary, increasing the company's share capital through new capital investments is a much safer and advantageous option than providing personal loans to the company. This strategy not only strengthens the company's financial position but also helps maintain transparency, credibility, and long-term stability. If you're considering providing financing to your company, we recommend exploring capital investment options that support long-term growth and sustainable success.

Updated on: 22/03/2024

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