The money question: How to fund a new business venture?

Anu is a 35-year-old graduate. She stopped working after she got married and had two children. Now that the kids are older, she wants to start her own boutique and workshop. Her husband Manish has agreed to fund the project, which requires an initial outlay of Rs 15 lakh.

Manish is a senior manager with a software company and is doing well professionally. What are the factors that Anu and Manish must consider while planning for the new venture?

Anu and Manish must consider the provisions of clubbing of income under the IT Act before deciding how to fund Anu’s venture. If Mahesh gives the money to Anu, it will be considered a gift. The profit that the business makes from this money will continue to be regarded as Manish’s income.

It will be added to Manish’s total income and taxed at the marginal rate of tax applicable to him. Since Manish has a good job with a high salary, this could mean taxation at the highest rate. However, if the business makes a loss in the initial years, Manish can set it off against his income. Once the venture starts showing a profit, it will be added to his income.

The same conditions apply if Anu takes funds from her in-laws. If she is unable to arrange funds from external sources, a better way to conduct the transaction would be to take the money from Manish as a loan. In such a case, any profit from the business will be considered her income.

However, the couple must ensure that the loan is taken at a reasonable rate to be considered a genuine loan. If not, the tax authorities may negate the loan transaction and club the income from the business with Manish’s income.

Anu can also take a loan from a bank or other lenders, but doing so without bringing in a margin or providing a security of some nature, can be an issue. Under the circumstance, a loan from Manish is a good option.

Any interest that she pays Manish could be considered a business expenditure and deducted from the income she earns from her business. Besides, such a loan will give her the flexibility while paying the interest and in the repayment of loan during the initial period as her business stabilises.