Debt vs. Equity

The lifeline of every early-stage enterprise is the financial resources that will allow it to develop its intellectual property, increase its sales, and grow the business.

Financing may come as common or preferred stock equity, SAFE (Simple Agreement for Future Equity), convertible notes, shareholder loans, and financial institutions’ loans.  There are important tax ramifications to remember for each of them.
Common and preferred stock equity.   This capital usually stays in the business until the stock is sold. When dividends are paid, they are not deductible at the corporate level and are taxable to the investors.  There is a requirement that corporations pay dividends if the accumulated earnings are $250,000 or more and there is no reasonably foreseeable need for this cash.  If there are positive retained earnings or current-year net profits, any distributions to the investors with respect to the stocks are dividends.  Once earnings and profits are paid out, any additional payment can be considered a return of capital up to the amount of the Read more

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