How to handle repayments of loans from family?

[LunaMarga]

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I am a sole trader looking to help out my daughter and son in law buy a cafe.
I have agreed to finance the buying of the lease but expect the cafe business to pay back the loan to me.
How can I receive payments from the cafe so it does not look like income to me?
(I will be in a partnership agreement with them in the cafe)
Thanks for your help.

[SmallBusiness Accountant]

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Hi LunaMarga,

Just for clarification, when you say you have agreed to finance the buying of the lease, what do you mean by that? Are you agreeing to personally guarantee the lease (rent) of the cafe or are you lending them money upfront? Are you charging interest to your daughter and son and law?

When you say partnership agreement, does this mean that you are one partner in a partnership? What structure are they operating the business through?

If you are personally guaranteeing the lease, you should seek advice as to how you are liable in the event that they cannot make the lease payments. If you are a partner in a partnership, you will also become liable for any debts the business incurs, as partners in a partnership are jointly and severally liable.

In regards to receiving payments from the cafe, so long as you document that you are lending them money, then you shouldn’t have any issues. If you are charging interest on any money you lend them, then only the interest will be income to you.

I hope this helps

Cheers

[LunaMarga]

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Thanks for your reply.

My husband and I are loaning the money to the partnership (me, my husband, daughter and son-in-law). We have a formal partnership agreement drawn up. So we will loan the partnership the money to buy the lease and SAV.
The business (partnership) will repay the loan to us interest free.
The partnership will own the lease.

thanks

[SmallBusiness Accountant]

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Hi Luna,

Have you had any advice regarding the structuring of the entity which runs the cafe? There are both tax and asset protection advantages and disadvantages in whichever structure you through, so if you haven’t already, you may wish to speak to your accountant.

Just from an outsider looking in, having a partnership doesn’t offer much in the way of asset protection. If any of the partners own assets (such as your home), if the business has difficulty paying liabilities, creditors can essentially pursue the individual partner/s who have the most personal assets to recoup the debts.

Operating through a company or trust isn’t bulletproof, however it does make it more difficult for creditors to attack you personally. I only mention this because if you have 4 people in the partnership, each person is liable for partnership debts and by operating through a partnership this will expose all 4 of you if something goes wrong.

Best of luck

[Author]

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