Jennifer,
My partner is interested in a new piece of equipment that I do not plan to use. I refuse to pay for it. He wants to contribute capital to our practice to buy it. Is that the best option or should we book a loan? What do you think?
Thanks,
Dr. L
Answer:
Equity or Debt - tough question! I cannot give a best answer in a vacuum without the Operating Agreement or Shareholder Agreement for the entity... without the organizing document I do not have insight into the treatment of capital. Without that information, I can conjecture what the impact will be by the booking of more capital - which may very well be no impact, except for an increase in 1 partner's capital account. Of course, the impact may, in fact, result in you diluting yourself - by you not participating in the capital contribution - but that impact would have to be documented in the organizing document.
The alternative to a capital contribution is issuing debt - booking the infusion as a loan. Permissions for partner loans would also be documented in your organizing document, as would potential loan terms (interest, repayment, etc). Of course, based on your organizing document, perhaps neither capital or equity are appropriate, if such a large expenditure requires unanimous member consent, or support your partner does not have for the new expenditure...
Whichever way you decide to go, let's make sure the direction is properly documented legally and also booked properly (whether internally or by your accountant).
