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Loaning Money to Your Own LLC

Loaning Money to Your Own LLC
Lauren Ward
Lauren WardUpdated April 22, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Did you know you can loan your own company money?If your business is structured as a limited liability company, or LLC , it means you aren’t personally liable for any of the company’s debts. You are, however, free to loan your own money to the company (and as much as you’d like) to help it meet its daily operating expenses or generate new business. In some cases, this type of loan may be preferable to borrowing money from a bank or other source. However, there are several things to keep in mind, including the tax implications, as well as what happens if your LLC can’t pay the money back.Recommended: The Essentials on Small Business Financing and Credit Here’s what you need to know about loaning money to your LLC.  

Can You Loan Money to Your LLC: The Short Answer

Yes. The only hitch is that you’ll need to have the proper paperwork drafted to acknowledge what the business owes you and how it will repay the loan. In addition, your LLC will need to make regular payments, and you’ll have to charge at least a nominal interest rate to make the transaction legal.

Can You Loan Money to Your LLC: The Long Answer

Yes, but there are several things to keep in mind before you loan money to your LLC.

Separate Entity

You should only lend money to your LLC once it is legally established as an LLC and your state recognizes it as such (choosing a business structure like an LLC needs to be done well in advance of the loan). Once the state accepts the LLC's formation paperwork, the company exists as an entity that is legally separate from its owners (called members). Under the law, the LLC can do many of the things that an individual does, including entering into contracts, hiring employees, and taking out loans. One advantage of an LLC vs a sole proprietorship is that owners can enter into arms-length transactions with the company (meaning each party is acting independently).State laws by default allow members to loan money to their own LLCs. However, an operating agreement signed by the members can prohibit or limit this practice, so it’s important to read your LLC operating agreement carefully before making a loan to your LLC.

Equity vs. Debt

When members of an LLC put money into the company that does not have to be paid back, the investment is considered an equity contribution that increases the member's ownership interest in the company. When the company becomes profitable, that member will get a greater share of the profits. If a member contributes money that the LLC has to pay back, it does not affect the ownership structure of the company. It is treated as a loan and falls under the category of funding through debt.

Lending Your Money Correctly

To make your loan to your LLC official and legal, you’ll need to draw up a formal loan agreement that includes:
  • Who the creditor is 
  • Who the debtor is
  • Exact loan amount
  • Repayment schedule
  • Interest amount
  • Consequences of defaulting
  • How payments should be submitted
It can be a good idea to have an attorney prepare the loan agreement so all the required conditions are included. Once you make the loan, you’ll need to make sure that the company repays the debt and upholds the terms of agreement.

Tax Considerations of Lending Money to Your LLC

When you receive payments from your LLC, they will be split between principal and interest. The Internal Revenue Service (IRS) considers any interest paid to you as taxable income, even if it’s interest on a loan you made to your own company. The principal amount your LLC pays back, however, is not counted as taxable income because you already paid tax on it the year you had that income. On the LLC’s side, the IRS treats a loan from an LLC member the same as it treats other types of small business loans. The loan itself is not considered taxable income to your LLC, since the money will be repaid. The interest your LLC pays you on the loan is a tax deductible business expense. Repayment of the principal is not tax deductible. 

Can You Recover a Loan From Your LLC in Case of Bankruptcy?

The answer depends on your LLC’s existing debts and what was agreed to in the loan agreement. In a bankruptcy proceeding, lenders with secured loans get first priority. Any of your LLC’s assets that have already been spoken for by a lender would be liquidated to pay those debts first. If all of the LLC’s assets are not already spoken for, you might be able to seize them to recover the loan if such action was stipulated in your loan agreement under what would happen as a result of unmet payments. Without anything clearly outlined, other members may question your right to those assets, especially if it was clear when you made the loan that your LLC might go out of business. It could be argued in court that you only made the loan so that you could gain access to those assets afterwards. Bankruptcies can get ugly, which is why you need everything in writing.  

Pros and Cons of Loaning Money to Your LLC

Loaning money to your own LLC avoids the time and effort involved in applying and getting approved for a business loan from an outside lender. Depending on the interest rate you set, it could also be less costly to your LLC than getting a commercial loan. Extending a loan to your LLC also shows potential investors that you have faith in the company's future.However, loaning your own money to your LLC also involves time and paperwork, and you may need to consult an attorney to make sure the loan agreement is legally sound, which can add to the expense. And, while loan interest payments are tax deductible to your business, you lose this benefit if you make the loan yourself, since you will have to report these interest payments (and pay tax on them) on your personal taxes. You’ll also want to keep in mind that lending money to your LLC involves risk. If the company were to go belly up, you might not get your money back. Recommended: Tips for Starting a Small Business
Pros of Loaning Money to Your LLCCons of Loaning Money to Your LLC
Fast influx of money for the companyRequires drawing up detailed paperwork
Loans have a tax benefit for the LLC that a contribution doesn’t provideYou may need to hire an attorney (which adds to cost)
Credit score and cash flow will not be scrutinized by a bankInterest payments must be reported on your personal tax return, which can negate the tax benefits of a business loan
Shows investors you have faith in your businessYou could lose your money if the company hits hard times

The Takeaway

Loaning money to your own LLC can be a viable source of funding for your business, but you’ll need a binding legal contract between you and the LLC stipulating the terms of the loan, otherwise the IRS can deny the validity of the loan. You’ll also want to keep in mind that by loaning your own funds to your LLC, you lose some of the tax advantages of business financing. And, should the company file for bankruptcy, you could lose your money.If you decide an outside loan may be a smarter choice for your LLC (or you just want to explore all your options and compare business loan rates), Lantern by Sofi can help. By filling out one simple form, you can instantly get offers from multiple small business lenders without making any type of commitment.

Frequently Asked Questions

Can you loan personal money to an LLC?
What are your options for funding an LLC?
Can you borrow from your own LLC?
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Photo credit: iStock/monkeybusinessimages

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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