What Kinds and How Much of Your Personal Assets to Invest
by LegalNature - December 2011
There are several ways for a person to invest in a partnership, and whether it be a business that is just forming or is already established, the decision on exactly what to invest and how much can be critical to the investors success. First, the investor must determine what role they wish to play prior to entering into a partnership agreement. Choosing between an active role in the daily operations of the business, or remaining a silent partner with little responsibility can help to determine what and how much of their personal assets to invest.
Generally speaking, determining how much to invest depends on what your investment is and what the realistic expected return on that investment could be. There are many types of assets that can be invested in a partnership; cash, stocks and bonds, vehicles, houses, land, annuities, jewelry and life insurance are all acceptable assets. Unlike cash, tangible property value is determined by fair market value when it is invested. Prior to investing the assets, a partnership agreement must be formed that will detail how the investor is to receive compensation for his investment, again depending on the level of his involvement within the partnership.
There are several ways to receive a return on the invested capital. If the partner is to remain silent, interest can be paid out on the invested capital, assuming there is a profit. Silent partners can also receive dividends from the profit of the business. Active partners can use the invested capital as a guarantee of compensation in the form of a salary, and they can receive additional compensation from an arranged bonus structure.
It is important that the investor perform thorough research into the prospective partnership in order to determine the amount of their personal assets to invest. Questions such as how long the partnership has been in business and the prospects of its continued prosperity become vital in determining the level of investment. Is the business actively seeking investment or is the investor searching for an opportunity? Do they appear to need capital? These are important questions to answer and they will determine what assets to invest.
Determining the level and type of investment in any business depends upon the risk and potential rewards of the investment. Generally, investing in an established partnership that has a history of profitability is the safe play but it will return less on your investment than if you were getting in on the ground floor of a startup with great potential. It is difficult to negotiate a high return on your investment in an established partnership. More likely, your investment will secure a position with the firm and guarantee your compensation and the risk to your investment is low. Investment in a startup company can create the potential for a large return but the risks to your property are higher and there is no guarantee of compensation unless the partnership becomes profitable. Investors must weigh these scenarios carefully before committing their assets to one or the other.