Can You Lend Money to Your Own LLC Business?

By Lee Hall, J.D.

Can You Lend Money to Your Own LLC Business?

By Lee Hall, J.D.

A new, small business is rarely profitable overnight. An owner might have to use personal money to nurture a new limited liability company (LLC). When the owner or owners, also called members, invest personal funds in the LLC, the infusion of cash constitutes equity or debt that the LLC must repay. If you're thinking of lending money to your own LLC, there are some important factors to consider.

Two people talking over documents

Separate Entity

Once the LLC exists under the laws of the state, the new company exists as a separate being from you, the owner. You may lend it money.

You might need to supply the company with capital so it can pay its bills: rent, internet, print costs, and so on. Most states permit you—and any other LLC members—to lend unlimited amounts of money to the LLC. Members may limit this prerogative through the company's operating agreement.

Equity vs. Debt

Money a member invests in the LLC that the company need not repay is deemed an equity contribution. This contribution increases the member's ownership interest in the LLC.

If you simply lend money to your LLC, your company becomes a debtor and you become a creditor. Be sure to properly classify the loan in your LLC's accounting system as debt, not equity.

Lending Your LLC Money Correctly

To have an enforceable loan, put the terms in written form. Clearly designate the relationship between you, the creditor, and your LLC, the debtor. Set forth the loan amounts, the expectation of repayment, the LLC's repayment schedule, and the consequences of failure to make a timely payment.

A member of the LLC—in this case, you—must sign the documentation of the terms of the loan repayment, called a promissory note. It should set forth the date and principal loan amount, identify the lender and the legal names and addresses of both parties, and make clear where the LLC should submit payments, the interest rate or terms that no interest accrues, and a maturity date for the full repayment.

To avoid triggering scrutiny by the Internal Revenue Service (IRS), many LLC owners set a "fair market" interest rate, although they might decide to give the company an interest-free period and extensive time for repayment in full.

Once the loan is established in writing, carefully track the outstanding balance. Classify the loan as debt on the company's books and an asset on your personal account.

Tax Considerations

The IRS views the LLC's payment of interest on the loan as new, taxable income to you. The repayment of the principal to you does not constitute taxable income.

For the LLC, the interest is a deductible business expense—unlike dividends paid on capital investments, which are not deductible.

You can take out equity you have invested at any time, which is nontaxable. Yet any gains or dividends are subject to taxation as capital gains. Note here that the IRS might deem the loan a capital investment if the principal is relatively large. In this case, the IRS may classify the repayments as dividends.

Payback Priorities

Note that investments made in a company that goes into Chapter 7 bankruptcy rarely become recoverable. This is because creditors must be paid back before investors.

The Bottom Line for Lending to Your Own LLC

Take time to draw up the paperwork that establishes each loan's terms. Your careful documentation protects you in case of an audit, and it is good bookkeeping practice. Ensure that your LLC does, in fact, abide by your repayment schedule in every case or apply the consequences of nonpayment. Always keep your records updated. When you lend money to your LLC correctly, you can establish and strengthen a viable business.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.