- Lending money to your own limited liability company (LLC) is a common way for a business owner to help their small business with cash flow or working capital, especially with a new business.
- Owner loans are legal in most states and involve funding the business through debt or equity.
- While there’s no limit to how much a member can contribute to fund an LLC, there are nuances to the process and reasons for and against doing it.
- Learn more about giving a loan to your own LLC in this article by Nav’s experts.
Can I Lend Money to My LLC?
Many small businesses need help with financing, particularly when they’re starting out, and entrepreneurs and small business owners often use their own money to found a business or help keep their businesses afloat. Under most state laws, it is legal to lend money to your own LLC. However, your LLC may decide to create an operating agreement to keep members from lending money to the LLC in order to avoid certain tax complications.
Can an Individual Give an Unsecured Loan to a Company?
A member of an LLC can give an unsecured loan to their company, as can a third-party who’s not involved. It’s important that the lender get the terms of the loan in a written loan agreement, including the full loan amount, repayment dates, and interest rates.
What Are the Pros and Cons of Making Loans to Your Own Business?
There are several aspects of lending to your own business to consider before you make a personal loan to your LLC.
- Lending to yourself is faster and easier than most traditional business financing methods
- You can set your own terms and interest rates
- There’s no application process or fees
- Borrowing from yourself keeps you from giving away ownership in your company
- You can get the cash right away, as long as you have it in your personal bank account
- If your business is unsuccessful you may lose the money you lent to it
- Getting a loan from another member of your LLC may increase their ownership stake
- It’s riskier to use your own money to fund a business or startup
What Is the Difference Between Contributed Capital and a Business Loan?
There are a few differences between contributed capital and a business loan or LLC loan. Contributed capital is a trade for shares or stock in a business, as opposed to an outright loan. In this case, an owner or stakeholder might get more ownership interest for buying into the company or more equity. When someone makes a capital contribution, they expect to get their money back through dividends as the company grows and makes money.
A business loan is money that a company takes from a lender and will have to repay. Commercial loans or bank loans are common ways that small businesses get more money to start or grow their businesses. A company may consider taking personal loans from individuals, too, especially when a new business is just starting out or if they don’t qualify for more traditional small business loans or other business financing. One way to increase your business’s chance of qualifying for traditional loans and other financing is to learn how to establish business credit and improve your credit score over time.
Are LLC Loans Tax Free?
When someone makes a personal loan to an LLC, it’s not considered taxable income for the business. The Internal Revenue Service (IRS) treats the cash influx as debt that must be repaid. However, as the loan is paid off, the payments aren’t considered tax deductible.
An LLC business structure is seen by the IRS as a pass-through entity, much like a sole proprietorship, meaning that the company doesn’t pay taxes on income. Instead, individual members of the LLC pay personal income taxes or self-employment taxes, so the taxes are passed through to them.
However, the loan money has to be carefully documented and accounted for or you could face unexpected tax consequences. It’s a good idea to get a professional tax advisor like a certified public accountant (CPA) or other individual to help advise you on the particulars of tax laws around loans.
Can an LLC Write Off Groceries?
If you buy groceries for a business purpose, such as meals to entertain clients or snacks for employees in your office, you may be able to write off groceries as an LLC. However, if you’re just buying personal groceries, it’s not a tax deductible expense.
Can My LLC Pay My Mortgage?
It’s a bad idea to pay your personal mortgage or rent from your business bank account for tax purposes. As a business structure, it’s important for an LLC to be kept separate from any individual members to help maintain the corporate veil and keep members from being personally liable for business financing issues. You can pay yourself through a transfer or check out of your business bank account to your personal bank account and then use that money to pay for your mortgage.
How Do LLC Owners Avoid Overpaying in Taxes?
The best way to avoid overpaying in taxes as an LLC owner is to have a professional like a CPA help you find the right deductions for your business. There are a few tips that entrepreneurs and single-member LLCs may be able to include, such as:
- Writing off your home office or business equipment
- Finding a way to lower your tax rate
- Spend more money on your business
- Defer tax payments by paying into retirement funds
If you’re looking for ways to increase your business’s cash flow through business financing like a business line of credit, business credit cards, or a business loan, Nav can help you find the right financing for your business today. See your best recommendations with Nav today.