When I buy into a business, am I giving a loan or an investment? Why giving money for shares is not a loan

One of the most common—and costly—mistakes I see in business disputes is the confusion between a loan and an equity investment. While the distinction may seem obvious in theory, in practice parties often blur the line, leading to litigation when expectations are not met. A recent case illustrates just how dangerous that confusion can be.

In Gritsay v. Brooklyn Comprehensive Center (Kings County Sup. Court May 7, 2026), the plaintiff alleged that she paid approximately $750,000 over time in exchange for shares in a closely held company and was issued a stock certificate reflecting a significant ownership interest. At the same time, however, she also claimed that the defendants had promised to “repay” her investment within a short period—effectively treating the transaction as if it were a loan. This dual characterization—part investment, part repayable advance—became an issue in the litigation.

This is an example of where many business people go wrong. When you lend money, you are a creditor. You have a right to repayment, typically on defined terms—principal, interest, and a maturity date. If the borrower defaults, you can sue to recover the debt. By contrast, when you invest in exchange for shares, you are no longer a creditor—you are an owner. Your return is not guaranteed. It depends entirely on the performance of the business. If the company fails, your investment can be worth little or nothing.

In the case discussed above, the defendants argued that the plaintiff’s own statements created a factual dispute because she described the transaction as both a purchase of equity and a repayable loan—two fundamentally different legal relationships. Indeed, calling an investment a “loan” after the fact does not convert it into one. If the underlying agreement is for the purchase of shares, courts will generally treat the transaction as an equity investment, regardless of the parties’ informal language.

The risk is compounded when the deal is not properly documented. In many of these situations, parties rely on informal promises—“you’ll get your money back in six months” or “we’ll buy you out later.” But unless there is a clear, enforceable agreement providing for repayment, those statements may be legally meaningless. As the case shows, even the existence of a stock certificate and written agreement may not resolve the issue where the parties’ conduct and testimony point in different directions.

Another practical problem arises when payments are made in a way that does not clearly match the legal structure of the deal. In the case above, the alleged investment was paid in installments to multiple individuals and entities rather than in a single, traceable transaction. That kind of structure can further muddy whether the funds were intended as capital contributions, loans, or something else entirely—making enforcement significantly more difficult.

For business owners and investors alike, the lesson is straightforward: you must decide at the outset whether the transaction is a loan or an investment—and document it accordingly. If you expect repayment regardless of the company’s success, the transaction must be structured as a loan, with clear repayment terms. If you are receiving equity, you must understand that you are assuming the risk of loss in exchange for the potential upside of ownership. You cannot safely expect both.

If you are considering investing in a business—or have already done so and are unsure how your arrangement will be treated—give us a call. Obtaining legal guidance at the outset can prevent significant losses later. To learn more about us, see our profile here.