ABSTRACT
The most common source of outside finding is the entrepreneur's family and friends. This chapter examines how entrepreneurs approach these sources of funding and the inherent potential pitfalls. Entrepreneurs should take several key steps to ensure that family relationships and friendships are not destroyed by poorly executed business relationships. There are several advantages to relying solely on self-financing to launch a new business. Even if the entrepreneur plans to keep some of the profits in the business to fund growth, it is advisable to distribute enough cash to the shareholders to at least cover income taxes they will incur due to their ownership in the business. The entrepreneur should recommend that friends or family investing in the business consult with tax professionals in order to understand tax issues that may arise due to the investment. Small business expert Cliff Ennico recommends that, whenever possible, money secured from family members or friends should be structured as a loan or nonvoting stock.
