Owning a limited liability company (LLC) comes with plenty of perks. You have autonomy over your business operations, receive certain tax benefits, and in some cases, you can even borrow money from your LLC. Before you start using your LLC as an extra cash reservoir, it’s important to understand the legal requirements and restrictions surrounding this type of transaction. You’ll also want to take precautionary measures to avoid breaking third-party agreements and limit tax consequences. Use this guide as a starting point for everything you need to know about borrowing money from your LLC.Can I Borrow Money From My LLC?Yes! As a member of an LLC, you’re able to borrow money from it. However, if the LLC has other members, you’ll have to get their approval before you can move forward with the loan.
Tax Implications for LLC Loans
If you’re not careful, the IRS will treat your loan as a dividend or distribution, and require you to pay taxes on it. This can happen if you don’t document the loan properly or if you don’t follow the required procedures. You might also be taxed if the amount you borrow exceeds your annual contribution to the LLC or if the loan is canceled. In some cases, paying the loan off in full at the year’s end and immediately renewing it in the new year will also result in taxes. To avoid possible tax implications, it’s important to document the loan as a legally enforceable promissory note. Make sure to include specifics such as the loan amount, repayment schedule, interest rates, and whether collateral was used. There should also be minutes recorded expressing the loan’s authorization with signatures from every LLC member. Make sure the loan is shown on all of the LLC’s corporate books, records, and financial statements. Finally, the interest rate should be at the federal rate at the very minimum. On top of tax implications, be aware of any third-party violations and possible conflicts to shareholders. Violating corporate agreements can result in additional taxes or even fines.
The Bottom Line
If you’re planning on borrowing money from your LLC, make sure the transaction is properly documented. It can also help to consult with an accountant or legal expert to avoid possible mistakes or confusion. While borrowing money from your LLC can help you obtain financing, there are other safer, easier ways to get an influx of cash. Borrowing money from your business can drain your available resources. You may even run into difficulties or have to forgo opportunities if you don’t have enough working capital available. A small business loan or a business line of credit can relieve these problems. A small business loan or a business line of credit are flexible solutions that offer a burst of liquidity you can use to cover a large range of expenses. You can invest in your business, mitigate cash flow disruptions, expand operations, and much more. At National, we help small businesses secure financing that works for them. We maintain a database of over 75 different lenders, many of which feature relaxed requirements you won’t find from a traditional lender. Plus, we work to get you the funding you need fast. While traditional lenders take weeks or months to approve your application, our entire process works in hours. Ready to learn more? Fill out our 60-second application and learn how much financing you can qualify for.
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Lauren is the Marketing Manager at Nationalbusinesscapital.com. She has 7 years of professional experience with a focus on small business marketing and finance. She previously worked as a senior business analyst for B2B SaaS, Sky IT Group. She has covered topics including, business financing, startups, retail, taxes & regulations, etc. Her work has been featured by USA Today, Google & Yahoo News. Lauren holds a B.A. from the Fashion Institute of Technology’s (FIT) School of Business.