In 2010, I was approached by a family "friend" and talked into going into business with her. She promised me a bunch of things, "enticements," in order to get me to become a 50/50 owner in the LLC with her. Key was that I'd be loaning most of the money to the business. I insisted on a promissory note, and a fair interest rate. I had money in investments and was earning 8-9%, most of it taxed at the capital gains rate, meaning I was earning 7%-8% after tax on these safe, diversified, liquid investments. The new business was a retail store. I knew this would be risky. I said I need 12% interest rate, taxed at ordinary income, would be 8.5% after tax, just barely above my safe income. Furthermore the latter required that I work for free, full-time for this business for the first few years. Repayment would be subject to the business' cash flow. Loan amount was $250,000. She also put in $17,000. Her accountant friend later told me that the IRS has limits on how much I can charge for interest, and 12% seemed high. Huh? Why didnt they bring this up 3 years ago? I know, it may seem high, but I have a valid reason justifying the rate. Question #1, is her accountant friend right? Is this rate too high?
The business partner agreed with the rate verbally, then she instructed the attorney to put the necessary things in the Operating Agreement, including 12% rate and promissory note, but then delayed things as I started loaning the money, and when I was locked into the business, she stopped negotiating without a word. Finally, I stopped loaning money out of protest on lack of progress. Nothing happened. A year after I started loaning the money, she said the rate was" way too high" and I said I wanted out of the business. This was April 2011. All along, I had complained about the lack of progress, but all I got were delays, excuses, or no answer.
Several months later, I asked her what rate does she think would be fair? She said that she'd let me know, then never gave me an answer. Later, I said that I'd give a 2% discount if she'd just sign the promissory note as she had promised, and an additional 1% reduction in years where at least the higher or $12,000 or 10% of the principal balance was paid down. In other words, I negotiated against myself and offered to drop the rate to 10%, which was what her own accountant friend suggested, or even to 9% if there was principal repayment. She said she'd let me know, and never gave me an answer or a counter offer.
Finally, 2 years later, we closed the store, there is only $90,000 to split, meaning I have a huge loss, and now she's claiming that I have no loans because, get this, there is no agreement on the interest rate and no promissory note (only because she refused to negotiate on both)!!! Worse, her accountant friend, who should be being neutral since she's the company accountant, and we are both 50% owners of this business, but she is agreeing with the other owner, and said that "Since you both couldn't agree on an interest rate, the promissory note was never signed. In the IRS eyes, these loans would be considered Paid In Capital if we were to get audited, since this situation has not been resolved timely." This only was not "timely" because she waited over a year to complain about the rate, then stonewalled when I tried to negotiate on it. Same for the promissory note. She said they'd take a look at it, then said they wanted documentation/confirmation of the amount of debt owed, which I provided. Then nothing happened. They refused to negotiate or sign anything. So question #2: Is the accountant's statement correct, that the IRS would consider the money I loaned as paid-in capital because we didnt reach agreement in a timely manner (only because she refused to negotiate)?
The business partner agreed with the rate verbally, then she instructed the attorney to put the necessary things in the Operating Agreement, including 12% rate and promissory note, but then delayed things as I started loaning the money, and when I was locked into the business, she stopped negotiating without a word. Finally, I stopped loaning money out of protest on lack of progress. Nothing happened. A year after I started loaning the money, she said the rate was" way too high" and I said I wanted out of the business. This was April 2011. All along, I had complained about the lack of progress, but all I got were delays, excuses, or no answer.
Several months later, I asked her what rate does she think would be fair? She said that she'd let me know, then never gave me an answer. Later, I said that I'd give a 2% discount if she'd just sign the promissory note as she had promised, and an additional 1% reduction in years where at least the higher or $12,000 or 10% of the principal balance was paid down. In other words, I negotiated against myself and offered to drop the rate to 10%, which was what her own accountant friend suggested, or even to 9% if there was principal repayment. She said she'd let me know, and never gave me an answer or a counter offer.
Finally, 2 years later, we closed the store, there is only $90,000 to split, meaning I have a huge loss, and now she's claiming that I have no loans because, get this, there is no agreement on the interest rate and no promissory note (only because she refused to negotiate on both)!!! Worse, her accountant friend, who should be being neutral since she's the company accountant, and we are both 50% owners of this business, but she is agreeing with the other owner, and said that "Since you both couldn't agree on an interest rate, the promissory note was never signed. In the IRS eyes, these loans would be considered Paid In Capital if we were to get audited, since this situation has not been resolved timely." This only was not "timely" because she waited over a year to complain about the rate, then stonewalled when I tried to negotiate on it. Same for the promissory note. She said they'd take a look at it, then said they wanted documentation/confirmation of the amount of debt owed, which I provided. Then nothing happened. They refused to negotiate or sign anything. So question #2: Is the accountant's statement correct, that the IRS would consider the money I loaned as paid-in capital because we didnt reach agreement in a timely manner (only because she refused to negotiate)?
