If you’re wondering whether you can borrow money from your business, you can. However, you must meet certain requirements to avoid tax consequences and conflicts with third-party agreements, such as bank loan covenants.
Can I Borrow Money From My LLC?
Any member of an LLC can borrow money from it. However, if the LLC has other members, they must approve the loan and report their authorization in the LLC’s minutes.
An advance of funds to a member can only be considered a loan if the LLC creates a legally enforceable promissory note for the repayment of the loan. The note should include the specific amount of the loan, the interest rate, a repayment schedule, and a description of any collateral or guarantees. The transaction should be recorded as a loan on the LLC’s books.
The American Institute of CPAs goes into more detail about borrowing money from your business or LLC.
Tax Implications for LLC Loans
The IRS could consider your loan a taxable distribution. This could happen if the amount borrowed exceeds how much you contribute to your LLC. In this case, the IRS could classify the distribution as a taxable gain.
A loan to a member might also incur tax if the loan is canceled. The cancellation would become a distribution and taxable income to the borrower.
If you borrow money from your LLC, you should pay interest on the loan every month or every quarter, much like you would on a commercial loan. The interest rate must be at least the federal rate the IRS charges for delinquent balances.
The Bottom Line
Business owners have many avenues for funding, and they should explore each option carefully. Business owners often borrow from their businesses. As long as the transaction is properly documented, you shouldn’t have any problems.