What is Love Money?
Born in the United States in the 1960s, Love Money is composed of the amount resulting from the investment of relatives (friends, family, entourage, etc.) in the project of a business creator. This amount, comparable to relational savings, can vary from several hundred to several thousand euros.
The amounts brought to the startup can be in the form of a donation or a loan between individuals. They come with favorable payment terms.
Remember: each parent can donate up to 100,000 euros per child without paying gift tax. This allowance can be used once or more times every 15 years. The allowance for donations given to grandchildren is limited to 31,865 euros (5,310 euros for grandchildren).
Contributions can also be made in the form of equity participation in the company. Investors become shareholders of the company (SARL, SAS or SA, etc.) in the appropriate proportion of their contributions.
The amount of these contributions as well as the names of the shareholders must be announced, preferably within the framework of a shareholders’ agreement. If the activity does not go away and generates losses, the investor may lose his initial investment.
Tax advantage for investors
Investing in Love Money, in the capital of a relative who created his company, gives shareholders a certain number of rights, including receiving dividends if the activity becomes profitable. They can also periodically give their opinions to the management of the startup.
In return for the amounts invested in the company’s capital, they will benefit from a reduction in income tax equal to 25% of the amounts invested as long as they meet certain conditions:
- The subscription (in cash) should be in respect of an unlisted company.
- The shareholders promise to keep all their shares for at least 5 years.
This tax reduction is equivalent to 18% of the amount of payments made by the taxpayer within the limit of a ceiling of 50,000 euros for one person or 100,000 euros for a couple subject to joint taxation.
The reduction obtained is included in the calculation of the cap on tax loopholes of 10,000 euros / year.
To note: the portion of the payment that exceeds these limits may give you a tax deduction for the next 4 years.
If there is a payment of subscriber contributions before 5 years, the units or shares that justify the tax reduction for the capital subscription of SMEs will be withdrawn by the tax authorities.
If the securities are resold, any profit will be subject to capital gain on the sale, through a flat-rate deduction (PFU) at a rate of 30%, or to the progressive scale of income tax if this option is more favor to the taxpayer.
If the creator of the business does not have relatives who are likely to finance him, he can use a crowdfunding platform.
Pros and cons of Love Money
For the investor, the main interest of Love Money is to give a loved one an opportunity by financing their business project. Possibly, the promise of profit is secondary.
For the creator, these contributions are beneficial because their costs are low and they can be easily mobilized. The total of this equity can be used to find additional financing from a bank where it provides a serious guarantee.
In both cases, the main disadvantage of this formula is the possible opposition of the creator and some of his relatives if the project fails. A pitfall avoided by crowdfunding and its anonymous funding.
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