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.
FAQs
Yes, it's technically legal for a member to borrow money from their LLC. However, you must get approval from other members if you're not the sole business owner. In addition, you must follow specific rules to avoid penalties or risks.
Can I borrow money from my LLC? ›
Can You Borrow Money From Your LLC? Yes, but you'll need to get written approval from the other members of your LLC. The members must also create and legalize a contract outlining the amount of debt, repayment schedule, and repercussions of a default during the LLC's minutes.
Can I withdraw money from LLC? ›
Instead, you pay yourself by taking money out of the LLC's profits as needed. That's called an owner's draw. You can simply write yourself a check or transfer the money for your business profits from your LLC's business bank account to your personal bank account.
Is it hard for an LLC to get a loan? ›
If you have good credit and can meet the lender's eligibility guidelines, getting a business loan with an LLC can often be easy. But new businesses and businesses with limited revenue may have difficulty getting approved, especially with traditional banks and credit unions.
Can I loan money from my LLC so I only have to pay myself once a year? ›
LLC members can also take a loan from the business. This option allows the members to access cash without affecting their tax liability. However, the loan must be documented and repaid with interest, according to the LLC's operating agreement.
What credit score does an LLC start with? ›
This EIN allows your LLC to open bank accounts, apply for loans, and build credit in its own name. An LLC starts with no credit score. Just like an individual, an LLC must build its credit over time by engaging in responsible financial behavior, such as taking out loans and lines of credit and making payments on time.
What happens if an LLC can pay back a loan? ›
Although an LLC helps protect your personal assets from liability for business debts, lenders often circumvent this barrier by requiring a personal guarantee. When you sign a personal guarantee, you agree to assume personal liability for repaying the loan if your company cannot make the payments.
Can you transfer money from LLC to personal account? ›
Getting paid as a single-member LLC
This means you withdraw funds from your business for personal use. This is done by simply writing yourself a business check or (if your bank allows) transferring money from your business bank account to your personal account.
Can I spend my LLC money? ›
You can take money out of your business account in any form you want—e.g., cash, paper or electronic checks, ACH payments, PayPal or Venmo. However you do it, you're responsible for applicable income and self-employment taxes on your business income.
How do I fund my LLC with personal money? ›
LLC Capital Contributions
This can be done in a variety of ways, such as writing a check or transferring funds from a personal account to the LLC's account. If you're going to use capital contributions to fund your LLC, it's important to document the transaction.
If your on-time payments are reported to business credit bureaus, you'll start building good business credit. Find easy net-30 vendors that report here. It's a good idea to have two or three net-30 accounts that you pay on time. Credit limits may be small to start, but that's fine.
Does an LLC loan affect credit score? ›
Any type of business loan could impact your personal credit if you personally guarantee the business account or your social security number is linked to the debt.
Can a new LLC get an SBA loan? ›
SBA Business Loan for New LLC: Your Options. Two primary SBA loan options are available for LLCs and other small businesses in need of financing: the SBA 7(a) loan and SBA 504 loan. Each has specific ways funds can be used, and they offer different loan terms and loan limits.
Can I borrow money to my LLC? ›
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.
What is it called when you pay yourself from your LLC? ›
Take an Owner's Draw (Profit Distributions)
Any owner of an LLC can be paid through profit distributions. Profit distributions are when the business profits get distributed among the members rather than reinvested into the business. These are sometimes called owner's draws.
What percentage should I pay myself from my LLC? ›
Some tax professionals recommend paying yourself 60 percent in salary and 40 percent in dividends to stay clear of IRS problems unless this means your salary would be too low compared to others in your field.
Is it legal to borrow money from your own company? ›
Yes, it's technically legal for a member to borrow money from their LLC. However, you must get approval from other members if you're not the sole business owner. In addition, you must follow specific rules to avoid penalties or risks. Here are crucial considerations about obtaining a loan through your LLC.
Can an LLC gift money to an individual? ›
Yes, but this is still you giving the gift, from a tax perspective (giving either an interest IN the LLC, as described above) or giving a gift of cash from the LLC's cash account, for TAX purposes, is still a gift from the self-employed individual, because the LLC is a pass-through.
Can you use your LLC money? ›
Getting paid as a single-member LLC
This means you withdraw funds from your business for personal use. This is done by simply writing yourself a business check or (if your bank allows) transferring money from your business bank account to your personal account.
