This content was created by MARK KOHLER. This content was uploaded by MARK KOHLER. This is a YouTube video titled "How to Treat Your Partner as a Lender | Mark J Kohler | Tax and Legal Tip" (created July 5, 2017) featuring Mark J. Kohler presenting tax and legal guidance. The content is a single-speaker instructional/tip video in which Kohler explains why partners generally cannot be treated as lenders, warns against "participating notes," and gives four practical tips for documenting loans (use a promissory note; include clear terms; specify penalties on default; secure the note with collateral). He also warns about securities-law issues when raising capital via many promissory notes and recommends consulting an attorney. The video closes with links to his tax/legal resources and a call to subscribe.
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Hi, Mark Kohler here with another tax and legal tip. Now, I want to talk about how to treat your partner as a lender. Now, really, that is kind of a trick title to this video because generally a partner is not going to be a lender. Now, sometimes you might have two or three partners and one of them loans some money to the partnership and you pay them off and all the partners agree to it. But if you're trying to treat a partner as a lender and that's how they're participating in the business, that's not allowed. Let me explain. You can't say to someone, hey, why don't you loan me $100,000 and I'll pay you 8% and 2 points, but you'll get 30% of the profit on the back end. Okay, you just made them a partner. Remember, a lender cannot be a partner if their part of the note is them getting a piece of the action. You may call that a participating note. The IRS calls it a partner. The court system calls it a partner. If you get in a lawsuit, they are now a partner and subject to the lawsuit. They cannot be getting a piece of the action as part of the note. Stay away from it. Don't do it. Now, with that said, would I love the money people in your business to be a lender? Yes. And for those of you that are a lender loaning people money, I want you to watch this, too. That's very, very important. Because having someone loan you money to expand your business or do a real estate project, that's great. But call them a lender, don't call them an investor, don't call them a partner. Watch my other videos on those topics. They can't be a partner or an investor if they're a lender. A lender loans money. And there's certain procedures we need to follow to make sure you document it properly. Let me go through four tips that's going to help you out and could save you thousands of dollars. You in a potential lawsuit or problems with the irs. Number one, have a promissory note. Have a document, not something in an email, not written on a napkin at Denny's in the middle of the night. And certainly they should not be a partner in your LLC because they're not a partner. They're a lender. They're loaning money and getting interest. So have a promissory note. Number two, this promissory note should have terms. It should be a healthy one or two pages long, and least it's going to talk about how much you're borrowing? What is the interest rate? When are you making payments? When are the payments due? Who are the parties to this agreement? All of the terms related to the relationship should be set forth in the promissory note and make sure it's reviewed by an attorney, especially if you are the lender, those watching this video. For those borrowing the money, having it reviewed is just as important. You want it clear, concise and to the point so there's no misunderstanding going into this relationship. Number three, penalties in default. Make sure that the promissory note is extremely clear on what happens if the borrower doesn't make payments. That may be you making the payments, but make sure it's clear. Is there a penalty of 3 or 5%? When's the penalty due? Is there interest on the penalties? And what happens if you can't make the ultimate payment back? What's to happen then? Is there a lawsuit? Is there collateral? Which we're going to talk about next? Is the note secured by something? These are all issues you want to be very clear about and have them spelled out in the promissory note. Number four is collateral. What is the collateral? A good promissory note should be based on some sort of collateral. Is it a trustee note tied to a piece of property? Is it a lien against a car, a business? Or is it just a personal guarantee against the individual that promises to pay it back? I don't know. Make sure it's clear. Again, this can prevent a potential lawsuit which could be so much more expensive than the note itself. Have security and make sure it's clear. And if there is some sort of lien, is it UCC recorded? Is it recorded against the property at the county level, make sure you securitize the note by recording the lien against whatever that collateral is. Now, one last note, and that is security laws, not the security that might be the collateral of the note. I'm talking about the state or federal sec. This is the issue of you taking a lot of notes to build up capital for your business. And they're just a bunch of promissory notes, maybe personally guaranteed by yourself. The SEC has generally classified those as a security. You could be in breach of securities law, which means you're going to jail. And if you default on a bunch of those notes, not good. But a note that has a security or collateral piece to it is exempt from SEC law generally. So what I want to encourage you to do is if you're taking notes from a lot of different people and you've got a lot of lenders involved and raising a lot of capital. Get a consultation with an attorney that understands securities law so they can protect you in the case of a potential lawsuit or loss. You do not want to have a criminal issue or security issue if you're not able to pay those notes back. But again, in sum, having lenders, having partners, having investors is great. I want you to succeed at your business. I want you to get money to maximize the value of your business and grow it. Just do it right, document it properly and be careful. Thanks so much for watching and if you found that helpful, please look in the description below. I've got links to my tax and legal library, my QuickBooks training videos, how to start a small business 50, 60, 70 videos, some as long as 30 minutes, explaining more information on tax and legal strategies that will change your life. Also, if you'd like to subscribe to my newsletter or check out my social media links, please click here. There are weekly free tips and strategies and articles that you'll find extremely helpful and I would appreciate it if you'd subscribe to my channel. I've got so many videos here I produce every week on my YouTube channel and I'd love to give you a ping every time I shoot a new video. Thanks so much and keep living the American dream.
