Many small business owners need help funding their business when they are starting out, growing, or experiencing cash flow problems. They may ask, “Can I make a loan to my LLC?” The answer is often yes: Entrepreneurs may be able to use their own money to found a business or help keep their businesses afloat. There are two ways to do this:
Each method of funding your LLC has pros and cons.
In most cases, it’s legal to lend money to your own LLC, but there are important tax implications and ownership considerations that should be addressed.
If you want to lend money to your business, think it through carefully and talk with your tax and legal advisors before deciding which approach is best. This is especially important when you operate your business through a legal entity like an LLC (as opposed to a sole proprietorship).
Before personally lending funds to your LLC, consider other small business loan options, like those from online lenders, banks, or credit unions. A 0% APR business credit card can also be a viable option for a new business, or one that needs short-term financing. Not only will a loan from a lender or card issuer clearly be considered a loan (and not an equity contribution), small business loans that are paid on time can help your business build good business credit scores. Comparing other types of loans can help you decide what’s the best move for your LLC.
This information is for educational purposes only. Be sure to consult tax and legal professionals for advice relevant to your situation.
Unless your operating agreement has restrictions on loans from members, generally a member of an LLC can give an unsecured loan to their company, as can a third-party who’s not involved in the business.
Before we get into more details, let’s review briefly how LLCs work. An LLC is a separate legal entity. It can have one member (single-member LLC) or more than one member.
A single-member LLC is automatically treated as a disregarded entity by the IRS, unless it files paperwork with the IRS electing to be treated as a corporation. Income and expenses are reported on the owner’s personal tax returns.
Some single-member LLCs choose to file as an S corporation or even a corporation for a variety of reasons.
An LLC with two or more members is automatically treated as a partnership by the IRS, unless it files with the IRS to be treated as a corporation.
While lending money to your own business can be fairly simple, remember you are loaning money to a separate legal entity— the LLC— which is not the same as loaning money to a friend or family member.
Loans to the LLC may be treated as bona fide loans, or as contributed capital (or “equity contributions”). These each have different implications when it comes to taxes and even ownership.
If you truly want to lend money to your business, you’ll want to ensure the loan is treated as a legitimate third-party debt (and not as a capital contribution). You’ll need a written loan agreement (promissory note), including the full loan amount, repayment terms, and reasonable interest rates. There have been some high-profile cases in Tax Court where the Internal Revenue Service has argued the business did not treat a loan as a loan, and the Tax Court ruled against the taxpayer, resulting in additional taxes owed. .
If you are the sole member of a single-member LLC you call the shots on how your business operates. This means you have less concerns about whether providing funds to your LLC will affect your ownership.
If you operate as anything other than a single-member LLC, though, loans or contributions could affect ownership. You may want to create an operating agreement to keep members from lending money to the LLC to avoid certain tax and ownership complications, as well as simple misunderstandings among members.
If you’re wondering, “What about lending to my own C corp?” check out this Nav guide that explains more on tax consequences for personal loans to corporations.
There are several aspects of lending to your own business to consider before you make a personal loan to your LLC.
