The job of a parent never stops but it does change as the child grows. For a while, a parent needs to take care of a child’s needs, but at some point a parent should focus on steering a child. The moment a child asks for help for a business is one time a parent should steer rather than help. BNP Paribas Global Entrepreneurs Report says that millennials are starting more businesses today, so the likelihood of some of these kids asking for help is high.
Will you be a business partner?
First thing is first, you need to make sure you understand the nature of your child’s request. You need to know if this money makes you a partner or are you simply an angel investor. Making this part clear makes everything a little bit easier, so be direct and candid right from the start.
The funding needed
You need to find out if the child is asking for a simple loan or an equity owner. Those simply lending money may want to charge interest, which is something that the IRS requires. Of course, debts can be forgiven if the business fails, but income tax must be considered. Be sure to consider a loan agreement to make sure everything is done right. Now, investing ensures that any success the business has is also a success for you; just make sure that you document the investment, detailing things like ownership terms.
Gifting the money instead
Many parents, especially the ones who do not want to deal with the added responsibility of being an investor, usually go the gift route. You do not have to worry about the money nor does it put pressure on your child. Still, tax law does need to be observed. As you know, each parent is only allowed to give a child $15,000 tax free, and anything above that is taxable at a tax rate of up to 40 percent.
Has insurance been obtained
Those taking the dive must make sure all personal assets are protected before entering a business agreement with your child. Your kid can establish an L.L.C. to ensure that all personal assets and finances are kept out of the business. This does not mean you do not believe in your kid rather it is a step to keep you safe.
It is important that you discuss some of these points with your child before getting involved in this financial risk. Be sure to be honest and completely open about what you intend to do and your responsibilities from here on out. It is okay to evaluate this business as you would any other because that is exactly what it is. Your child is an adult, so give this transaction the respect it deserves, and your child will learn to appreciate it.
