Lending money to your own LLC: Legal requirements and tax implications

You can lend money to your own LLC, and it's a common way small business owners inject cash into their business. Business owners may have debt they invested into their business to get started, says Ciara Stockeland, host of the Inventory Genius podcast. “I want your business paying you back for that” she says in an episode about managing debt for your small business. “But it's not this super stressful kind of debt like (a) 29% interest rate on credit cards.”

Still, there’s a right way to do it and a wrong way. Cut corners, and the IRS may consider the transaction as something other than a loan — which can mean unexpected taxes, lost tax deductions, and complications you don't need.

“Here's what I see all the time,” Stokeland says. “Owners inject money into the business, they don't record it properly…to be set up like a loan. It should sit on the balance sheet as a liability. There should be a written agreement (and)...an interest rate, even if it's a modest one. And there should be an amortization schedule. This is really important. Even if you're loaning your own business money, you need to do this.

“And here's why. If you don't structure it, you don't know what the business really owes you. You don't know if the business can really afford to repay you. And you blur the line between owner investment and debt.”

An LLC is a separate legal entity from its owner. That’s why many people form an LLC. It provides liability protection by keeping your personal finances distinct from your business finances. Because of that separation, a loan from you to your LLC is legally more like a loan to another person than simply moving money between accounts, and should be treated like that. 

This guide walks you through what you need to know about lending money to your own LLC: How to do it properly, including what to include in a loan agreement, what interest rate to charge, how it can be taxed, how to record it in your books, and mistakes to avoid.

Can you lend money to your own LLC?

In most cases, yes. Unless your LLC's operating agreement restricts members from making loans to the company, you can generally lend money to your own LLC as a member. This is true whether you operate as a single-member LLC or a multi-member LLC — though multi-member structures add some complexity we'll cover in a moment. 

There are two main ways business owners fund their LLCs:

• Owner loans: You lend money to the LLC, which is obligated to repay you with interest
• Capital contributions: You contribute money to the LLC in exchange for a larger ownership stake

Each method has different legal, tax, and ownership implications, which we'll cover in more detail in this guide.

Before committing to an owner loan, it's worth comparing other financing options. Small business loans from banks, credit unions, or online lenders — or even a business credit card with a 0% intro APR — may be viable alternatives. Financing from outside lenders that's paid back on time may also help your LLC build business credit over time, which may open more financing options down the road.

How to legally lend money to your LLC (step-by-step)

The IRS doesn't give special treatment to owner loans just because you're the one making them. To be respected as a bona fide loan — rather than a disguised capital contribution — the transaction needs to be set up as a real arm's-length loan.

Here’s how you may want to approach it. 

Step 1: Check your operating agreement

Before making any money moves, review your LLC's operating agreement. Some agreements include restrictions on member loans; for example, requiring approval from all members or prohibiting member loans altogether. If you're a single-member LLC without a formal operating agreement, this is a good time to create one.

Step 2: Agree on loan terms before money changes hands

Document the loan specifics before transferring any funds. This includes:

• The principal amount
• The interest rate (more on this below)
• The repayment schedule (monthly, quarterly, etc.)
• The loan term (the final date by which the loan must be repaid)
• Whether any collateral is involved

Step 3: Draft a written promissory note

A promissory note is the written record of the loan, and it's your primary evidence that a real creditor-debtor relationship exists. The note typically should meet the following requirements:

• Clearly state the principal amount, interest rate, repayment terms, and final maturity date
• Be signed by both parties (you as the individual lender, and you in your capacity as LLC manager or member)
• Ideally be executed on the same date the funds are transferred
• Ideally be reviewed by a legal or tax professional

The IRS has challenged related-party loans where no written agreement existed, and tax experts note that courts have sided with the IRS when there was no objective evidence of a true loan. Don't skip this step.

Step 4: Fund the loan and document the transaction

Move the money from your personal account to the LLC's dedicated business bank account by writing a check or initiating a transfer. Keep the bank statement or cancelled check showing the transfer. 

Step 5: Make payments on time

Once the loan is in place, the LLC needs to actually repay it — on time, with interest. This is where many owner loans fall apart. A loan with no repayment history looks like equity, not debt. Set up payments in your accounting software and stick to the schedule. Record each payment, tracking principal and interest separately.

Step 6: Track and report interest income

As the lender, you'll need to report interest income on your personal tax return each year. Keep a running record of all interest payments received from the LLC throughout the year. 

Owner loan vs. capital contribution

When you put money into your LLC, you have two options: loan it or contribute it. The table below compares the key differences.

Neither structure is automatically better. A loan keeps your ownership structure clean and creates a deductible business expense for the LLC. A capital contribution is simpler but affects the financial structure of the business. The right choice depends on your goals, your LLC's cash flow, and your tax situation.

What to include in an LLC owner loan agreement

A solid loan agreement is your best protection if the IRS ever questions whether the transaction was a real loan. Consider including the following elements:

Required elements:

• Names of the lender (you, as an individual) and the borrower (your LLC)
• Date the loan is made
• Principal amount
• Interest rate (at or above the AFR for the applicable loan term)
• Repayment schedule and payment amounts
• Final maturity date

Recommended elements:

• A provision for what happens if the LLC defaults
• Late payment penalties
• Whether the loan is secured by any LLC assets
• A clear statement of the lender's right to seek repayment

Administrative steps to complete after signing:

• Record the loan in the LLC's member minutes or a formal resolution
• Record the loan as a liability on the LLC's balance sheet
• File the signed note with your LLC's governing documents

The more your promissory note resembles a typical commercial loan, the better. Again, it’s a good idea to review the promissory note with your advisors. 

Can you charge interest on a loan to your LLC?

In many cases, it’s advisable to charge interest on the loan you make to your LLC. If you borrowed money from another source, you’d likely have to pay interest and/or fees. Charging a reasonable interest rate reinforces that the transaction is a real loan rather than a capital contribution disguised as one. It can also create a deductible business expense for the LLC.

Of course, the interest you earn is taxable as income on your personal return, so charging interest doesn't create a tax windfall. But it does create a cleaner, more defensible structure if your business is audited, or if you need to provide financial information to potential lenders or buyers of your business. 

The IRS sets a minimum benchmark called the Applicable Federal Rate (AFR), which is published monthly and based on U.S. Treasury yields. The AFR varies depending on the repayment term of the loan:

• Short-term AFR: For loans with a repayment term up to 3 years
• Mid-term AFR: For loans with a term of more than 3 years and up to 9 years
• Long-term AFR: For loans with a term longer than 9 years

You're free to charge more than the AFR, but charging less can trigger IRS imputed interest rules. Current AFR tables are published monthly on the IRS website.

What happens if you charge no interest or below-market interest?

If you charge interest below the AFR — or no interest at all — the IRS will impute interest under IRC §7872. Here's what that means in practice:

• The IRS treats the loan as if it carried the AFR, regardless of the terms in your promissory note.
• You must report interest income as if you received it — even if no interest was actually paid to you.
• The "forgone interest" — the difference between the AFR and what you actually charged — may be recharacterized as a capital contribution or other transfer depending on your relationship to the LLC.

The result: You can owe taxes on income you never received. This is why charging at least the AFR is not just good practice. In many cases, failing to charge adequate interest can trigger IRS rules for loans between related parties.

There is an exception, though: under §7872, if total outstanding loans between you and your LLC don't exceed $10,000, and the funds aren't used to purchase income-producing assets, the imputed interest rules may not apply. As with all things tax, make sure you consult a tax advisor before you rely on this exception. 

Tax implications of lending to your LLC

Owner loans can have tax consequences for both you as the lender and for the LLC as the borrower. Here's how the different pieces fit together.

How the LLC’s tax status changes the analysis

Not all LLCs are taxed the same way, and the tax treatment of your owner loan depends on how your LLC is classified by the IRS.

Single-member LLC (disregarded entity): By default, the IRS treats a single-member LLC as a disregarded entity. That means income and expenses flow through directly to your personal return (typically on IRS Schedule C). Because of this, the interest income you earn as lender and the interest deduction the LLC will often offset each other, depending on your tax situation.

Multi-member LLC (taxed as a partnership): A multi-member LLC is treated as a partnership by default. The LLC files its own return (Form 1065), and income and deductions flow to members via Schedule K-1. Interest paid by the LLC to a member-lender is deductible by the LLC and taxable as income to the member. The self-charged interest rule may apply (see below).

LLC that has elected S-corp or C-corp status: If your LLC has elected to be taxed as an S corporation, it remains a pass-through entity — income and losses still flow to owners via Schedule K-1 (Form 1120-S). But there's an important wrinkle: when you directly lend money to an LLC taxed as an S-corp, that loan creates what the IRS calls debt basis. Debt basis matters because S-corp owners can only deduct the entity's pass-through losses up to the combined total of their stock basis and their debt basis. A properly documented direct owner loan can increase debt basis and unlock loss deductions that would otherwise be suspended. 

One thing to watch: if pass-through losses reduce your debt basis and the loan is later repaid, that repayment may trigger taxable income in certain circumstances. If the loan was documented with a written note, the gain is typically capital gain; if it was informal open-account debt, it can be treated as ordinary income. 

Starting in tax year 2021, shareholders tracking debt basis are generally required to file Form 7203 with their personal return. The self-charged interest rule can also apply in the S-corp context. Given the added complexity, professional tax guidance is especially important when your LLC has made an S-corp election. 

Interest income for the owner

When your LLC pays you interest on your owner loan, that interest is ordinary income — reported on your personal tax return regardless of your LLC's tax classification. You must report it even if the LLC doesn't issue you a Form 1099-INT, the form used to report interest income.

Keep a record of interest payments you receive throughout the year, separate from any distributions or guaranteed payments you receive as a member. Bookkeeping software can make it easy to keep track of your income and expenses.  

Can the LLC deduct interest paid to the owner?

Generally an LLC can deduct interest on the loan paid to the owner if the loan is properly set up and maintained. Business interest paid on a bona fide loan is deductible under IRC §163.  

Certain businesses that have significant revenue (at least $31 million in 2025) may need to limit their business interest deduction to 30% of adjusted taxable income. Talk with your tax advisor and review the IRS FAQs on the deduction of business interest.

Self-charged interest rule

This is an advanced concept that applies in specific circumstances. Most single-member LLC owners won’t need to worry about it — but if you have a multi-member LLC or passive activity losses, it's worth discussing with your tax advisor. 

Here's the general scenario: if you own an interest in a partnership or S corporation (including a multi-member LLC taxed as a partnership), and you lend money to that entity, the interest income you earn might otherwise be treated as portfolio income. Portfolio income can't be used to offset passive activity losses. 

The self-charged interest rule under Reg. §1.469-7 corrects this by recharacterizing a portion of that interest income as passive income, allowing it to offset passive losses from the same activity.

The rule applies when:

• Loan proceeds are used in a passive activity
• You have a direct or indirect ownership interest in the borrowing entity
• The entity is a partnership or S corporation — not a single-member disregarded entity

The main takeaway here is that tax rules can get complicated, so consulting a tax professional is a good idea to make sure you follow them. 

How to record an owner loan to your LLC (accounting and bookkeeping)

Keeping accurate books is one of the most important financial tasks for your business. It spills over to everything else, including filing taxes, preparing financial statements, and even applying for some types of small business financing. 

But it can also be confusing, especially when you’re recording new types of transactions.

Here’s an overview of how to record owner loans to your LLC. Again, ask your tax advisor to help you customize this to your specific business needs:

Recording the initial loan deposit

When you fund the loan, you’ll record the following transactions in your register:

• Debit: Cash/bank account (asset account) — the LLC’s cash increases
• Credit: Loan from member/notes payable (liability account) — the LLC now owes this money

If you expect to pay back the loan within twelve months, it will be classified as a current liability. If you expect repayment to take longer than a year, it will be a long-term liability. Use a name such as “loan from owner” or “member loan payable” to make sure it’s clear in your accounting and on your financial statements.

Recording payments (principal vs interest)

Loan payments have two components: principal and interest. Each needs to be recorded. For each payment: 

• Debit: Loan from member / notes payable (liability account) — reduces the outstanding principal balance
• Debit: Interest expense (expense account) — records the interest cost to the LLC
• Credit: Cash / bank account (asset account) — reflects the outflow of funds

The interest portion of the payment will be an expense on the LLC’s income statement while the principal portion reduces the balance sheet liability. It’s common for owners to mix this up, so make sure you set up and record payments correctly from the start. It’s not something you want to leave until tax time.

A loan amortization schedule can help you understand how much to pay each month, and how much will go toward interest and principal. Get a free loan amortization template from SCORE. 

Year-end reporting checklist

Ask your accounting professional what specific documentation they will need. Generally, your checklist will include:

□ Confirm the total principal balance matches the running balance on your promissory note

□ Confirm the interest paid during th year is accurately included in your bookkeeping system

□ Determine whether the LLC needs to issue a Form 1099-INT (see below)

□ Report interest received from the LLC on your personal tax return (Schedule B, Form 1040) if required

□ Record interest accrued but not yet paid (for accrual-based filers)

□ For multi-member LLCs: confirm your Schedule K accurately reflects the interest deduction

□ Review whether your loan’s balance sheet classification (current vs. long-term) is still accurate

Single-member vs multi-member LLC considerations

Whether you operate a single-member LLC or multi-member LLC affects how an owner’s loan may work

Single-member LLCs

As the sole member of the LLC, you have full control over the LLC’s operations, including its debt. Other members don’t need to approve loans, and the loan won’t affect anyone else. Your main concern is to comply with IRS rules and regulations, as well as any state taxing requirements.

For a single member LLC taxed as a disregarded entity, remember that interest income and interest expenses will likely cancel each other out on your personal tax return. But you still want to correctly maintain your LLC’s finances to help ensure you maintain your LLC’s liability protection. 

Multi-member LLCs

Multi-member LLCs have additional layers of complexity. Pay attention to these additional nuances:

• Operating agreement review: Some agreements restrict or require unanimous approval for member loans. Review yours before any funds move.
• Self-charged interest: The self-charged interest rule under Reg. §1.469-7 applies to multi-member LLCs taxed as partnerships.
• Partnership audit exposure: An IRS audit of a multi-member LLC can result in adjustments applied at the entity level, which may affect all members. Proper loan documentation helps protect all parties in the event of an audit. 

What if your LLC can’t repay your loan?

If your LLC can’t pay back the loan you made to it, you don’t just shrug it off. If you didn’t pay back your bank or a credit card company, you’d expect consequences. 

Remember your LLC is a separate legal entity. You should generally treat a loan like you would any other loan. 

If you simply stop requiring the LLC from paying back the loan, the IRS may treat money you received from the LLC as distributions rather than loan repayments which may trigger taxable income. 

If you formally forgive the loan, the LLC may have cancellation of debt (COD) income, which can be taxable at the entity level. 

Either path has tax consequences. Consult a tax professional before taking any action to forgive, modify, or stop collecting on an owner loan.

Can you borrow money from your own LLC?

This is the reverse scenario: instead of you lending to the LLC, the LLC lends money to you. It's allowed, but the IRS scrutinizes these arrangements just as closely as loans in the other direction. 

If you think you may want to take a loan from your LLC, treat it formally, just as you would in the reverse scenario.

If the LLC advances money to you without a written promissory note, a stated interest rate, and a repayment schedule, the IRS may treat the funds as a distribution or as compensation rather than a loan — both of which carry their own tax consequences. In addition, a distribution that exceeds your basis in the LLC can be taxable. Compensation can be subject to payroll taxes.

In a multi-member LLC, there's an additional risk: distributions are generally required to be proportionate to ownership. An undocumented advance to only one member can create legal and tax complications with other members. 

If you want to borrow from your LLC, talk with your advisor about how to structure it exactly as an arm's-length loan with a promissory note, AFR (or higher) interest rate, and a repayment schedule you'll actually follow.

Best practices for lending to your own LLC

Put it in writing first. A written promissory note is strongly recommended. Draft it before transferring funds, sign it, and file it with your LLC's records. Back-dating or creating documentation after the fact can create legal and tax problems.

Charge at least the AFR. Check the current Applicable Federal Rate for your loan's term and make sure your interest rate meets or exceeds it. The IRS publishes updated AFR tables each month. You can charge more than the AFR, but not less without potentially triggering imputed interest rules under IRC §7872.

Make and record payments. A loan that's never repaid looks like equity to the IRS. Set up regular payments consistent with your promissory note and record each one, with principal and interest tracked accurately in your books.

Keep personal and business finances separate. Commingling funds creates bookkeeping problems and can undermine the liability protection your LLC is designed to provide. Loan proceeds should go directly into the LLC's dedicated business bank account.

Get professional advice. Talk to your tax and/or legal professionals to make sure the loan is set up properly, and then tracked correctly. Again, treat it like you would a loan with an outside lender. 

Review it annually. You need to review your financial information each year to pay taxes. When you do, review the loan terms and your progress toward paying it off.

Common mistakes to avoid

Skipping the paperwork. No loan agreement or amortization schedule can lead the IRS to reclassify the debt capital contributions, eliminate the interest deduction and change how repayments are taxed.

Charging too little interest. If you charge interest at less than the AFR, the IRS may impute interest, and you could owe tax on income you never received.

Not collecting payments. A loan with no payment history looks like equity. Stick to the repayment schedule in your promissory note and amortization schedule.

Commingling funds. Depositing loan proceeds into a mixed personal/business account creates bookkeeping issues and can weaken your LLC's liability protection.

Not reporting interest income. Interest you earn from your LLC is taxable income, even if the LLC doesn't issue a Form 1099-INT, and you’re typically required to report it on your personal tax return.

Not tracking principal and interest payments. Recording interest and principal in the wrong accounts distorts your financial statements and can make tax filing more complicated. 

Overlooking multi-member implications. In a multi-member LLC, a member loan can affect capital accounts and may require approval under your operating agreement. Don't assume what worked for a single-member LLC applies automatically to yours. 

Alternatives to lending to your LLC

Before you tap your personal savings, it's worth comparing what's out there. A few options to consider:

Small business loans: Banks, credit unions, and online lenders offer a range of small business financing options. Loans paid on time can also help your LLC establish and build business credit, which opens up more — and often more affordable — financing options over time.

Business credit cards: A 0% introductory APR business credit card may be a cost-effective way to cover short-term expenses without paying interest or pulling from personal funds. Just make sure you can pay it off before the intro period expires, or your interest rate will likely be high.

Business line of credit: A revolving line of credit can give your LLC flexible access to funds when you need them, and interest is charged only on what you owe.

SBA loans: The U.S. Small Business Administration offers several loan programs, including the 7(a) loan, the SBA Express loan, and SBA microloans. 

Frequently asked questions