Participation in business

A friend of yours starts a business and proposes that you participate by making a financial contribution. You believe that the prospects of making a profit in that business are good, so you decide to participate and make that contribution.

In this regard, the first thing you should do is to make it clear what the contribution will be for. To do this, negotiate with the other party whether you will have the right to recover the amount contributed –after the agreed period– or if you assume the risk of losing it in case the business does not make a profit. In short, make it clear whether you agree on a loan or a participation account.

Thus, if what you want is to participate in the business but retain the right to recover the contributed capital, you must sign a loan agreement. In this case, you can choose between one of these options:

• Ordinary. You can sign an ordinary loan, so that, after the agreed period, you will recover your contribution plus the interest that has been agreed.
• Participative. You can also sign a participative loan. This is a loan whose interest is variable depending on the evolution of the business, so signing it implies assuming a greater risk than with the ordinary loan. However, whether you opt for an ordinary loan or a participative one, you will retain the right to recover your contribution.

On the other hand, if you sign a participation account contract, you assume the risk of losing the contributed amount if the business does not generate profits, as there is no obligation to return the money received. In this type of operation, a natural or legal person (the participant) contributes goods, rights, or capital to participate in the activity or business of another (the manager), and both share the results of the business, whether there are profits or losses.

For all these reasons, avoid risks: if you are going to contribute funds to your friend's business, sign a contract that clearly states the conditions. Keep in mind that if the business achieves the expected profits, the risk of discrepancies arising is reduced. On the other hand, if the result is not as expected, the risk increases that the party who received the money will try to avoid its return by taking advantage of any loophole in the contract (for example, if you made the contribution without signing anything or if the signed contract was not entirely clear).