Did you know you can loan your own company money?If your business is structured as a limited liability company, or LLC , it means you aren’t personally liable for any of the company’s debts. You are, however, free to loan your own money to the company (and as much as you’d like) to help it meet its daily operating expenses or generate new business.
In some cases, this type of loan may be preferable to borrowing money from a bank or other source. However, there are several things to keep in mind when loaning money to your LLC, including the tax implications and what happens if your LLC can’t pay the money back.Here’s what you need to know about loaning money to your LLC.
Can You Loan Money to Your LLC: The Short Answer
Yes, you can loan money to your LLC. The only hitch is that you’ll need to have the proper paperwork drafted to acknowledge what the business owes you and how it will repay the loan. In addition, your LLC will need to make regular payments, and you’ll have to charge at least a nominal interest rate to make the transaction legal.
Can You Loan Money to Your LLC: The Long Answer
While you can loan money to your LLC, there are several things to keep in mind before moving forward.
Separate Entity
You should only lend money to your LLC once it is legally established as an LLC and your state recognizes it as such (choosing a business structure like an LLC needs to be done well in advance of the loan). Once the state accepts the LLC’s formation paperwork, the company exists as an entity that is legally separate from its owners (called members).
Under the law, the LLC can do many of the things that an individual does, including entering into contracts, hiring employees, and taking out loans. One advantage of an LLC vs a sole proprietorship is that owners can enter into arms-length transactions with the company (meaning each party is acting independently).
State laws, by default, allow members to loan money to their own LLCs. However, an operating agreement signed by the members can prohibit or limit this practice, so it’s important to read your LLC operating agreement carefully before making a loan to your LLC.
Equity vs. Debt
When members of an LLC put money into the company that does not have to be paid back, the investment is considered an equity contribution. An equity contribution increases the member’s ownership interest in the company. When the company becomes profitable, that member will get a greater share of the profits.
If a member contributes money that the LLC has to pay back, it does not affect the ownership structure of the company. It is treated as a loan and falls under the category of funding through debt.
Lending Your Money Correctly
To make your loan to your LLC official and legal, you’ll need to draw up a formal loan agreement that includes:
- Who the creditor is
- Who the debtor is
- Exact loan amount
- Repayment schedule
- Interest amount
- Consequences of defaulting
- How payments should be submitted
It can be a good idea to have an attorney prepare the loan agreement so all the required conditions are included. Once you make the loan, you’ll need to make sure that the company repays the debt and upholds the terms of agreement.
Tax Considerations of Lending Money to Your LLC
When you receive payments from your LLC, they will be split between principal and interest. The Internal Revenue Service (IRS) considers any interest paid to you as taxable income, even if it’s interest on a loan you made to your own company. The principal amount your LLC pays back, however, is not counted as taxable income because you already paid tax on it the year you had that income.
On the LLC’s side, the IRS treats a loan from an LLC member the same as it treats other types of small business loans. The loan itself is not considered taxable income to your LLC, since the money will be repaid. However, the interest your LLC pays you on the loan is a tax deductible business expense. Repayment of the principal is not tax deductible.
Can You Recover a Loan From Your LLC in Case of Bankruptcy?
The answer depends on your LLC’s existing debts and what was agreed to in the loan agreement. In a bankruptcy proceeding, lenders with secured loans get first priority.
Any of your LLC’s assets that have already been spoken for by a lender would be liquidated to pay those debts first. If all of the LLC’s assets are not already spoken for, you might be able to seize them to recover the loan if such action was stipulated in your loan agreement under what would happen as a result of unmet payments.
Without anything clearly outlined, other members may question your right to those assets, especially if it was clear when you made the loan that your LLC might go out of business. It could be argued in court that you only made the loan so that you could gain access to those assets afterwards. Business bankruptcies can get ugly, which is why you need everything in writing.
Can You Charge Interest on a Loan to Your LLC?
Yes, you can (and should) charge interest on a loan to your LLC. When loaning money to your own company, it’s best to draw up a formal loan agreement and have an attorney review it. You should charge an interest rate that’s in line with market rates and come up with reasonable loan terms.
Keep in mind that interest paid to you (even if it’s a loan you made) is considered taxable income by the IRS.
Pros and Cons of Loaning Money to Your LLC
Loaning money to your own LLC avoids the time and effort involved in applying and getting approved for a business loan from an outside lender. Depending on the interest rate you set, it could also be less costly to your LLC than getting a traditional business loan. Extending a loan to your LLC also shows potential investors that you have faith in the company’s future.
However, loaning your own money to your LLC also involves time and paperwork, and you may need to consult an attorney to make sure the loan agreement is legally sound, which can add to the expense.
And, while loan interest payments are tax deductible to your business, you lose this benefit if you make the loan yourself, since you will have to report these interest payments (and pay tax on them) on your personal taxes. You’ll also want to keep in mind that lending money to your LLC involves risk. If the company were to go belly up, you might not get your money back.
(Learn more: Personal Loan Calculator)
4 Other Ways of Raising Funds for Your LLC
If you decide against loaning your own money to your LLC, there are other funding options you can consider.
Term Loan
A term loan is a small business loan given to businesses by a bank, credit union, or online lender. Interest rates are typically fixed, meaning your monthly payments will not change throughout the course of the loan. Business term loans can be used for nearly every business expense.
Business Line of Credit
A business line of credit is great for businesses who want consistent access to funds. They work similarly to a credit card, where a lender gives you a maximum amount to draw on. You only pay interest on what you use, and can use the line again as you pay it down.
Equipment Financing
Equipment financing is a type of small business financing where the equipment serves as collateral for the loan.
Small Business Grants
Small business grants are money given to your company that do not need to be repaid. While they tend to be competitive, it can be worth your time and effort to secure this type of funding.
The Takeaway
Loaning money to your own LLC can be a viable source of funding for your business, but you’ll need a binding legal contract between you and the LLC stipulating the terms of the loan, otherwise the IRS can deny the validity of the loan.
You’ll also want to keep in mind that by loaning your own funds to your LLC, you lose some of the tax advantages of business financing. And, should the company file for bankruptcy, you could lose your money.
If you decide an outside loan may be a smarter choice for your LLC (or you just want to explore all your options and compare business loan rates), Lantern by Sofi can help. By filling out one simple form, you can instantly get an offer from a top small business lender without making any type of commitment.
This article originally appeared on SoFi.comand was syndicated by MediaFeed.org.
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The average American debt by age
Americans are carrying a record amount of debt lately. Just last summer, the Federal Reserve Bank of New York announced that U.S. citizens hit a new milestone: $1 trillion in credit card debt. And when you look at overall debt, the number soars to an eye-watering $17 trillion, with the typical American having $21,000-plus in personal debt (not including mortgages).
Debt seems to be woven into everyday life. Yes, inflation is down from the scary heights of 2020 and 2021, but it’s still an issue for many. And the overall cost of living is climbing, too, which may be why Americans are taking on more debt. A person has to eat, right, and live their life? Debt can be what gets people through.
Taking a closer look at how debt is tracking by age can help as you examine your own situation and think carefully about how you will manage your own debt load.
Here, you’ll learn more about the latest Federal Reserve and U.S. Census Bureau data and what it reveals about how Americans are using credit. Overall, people in their high earning years (early middle age) carry the most debt, typically in the form of mortgages, while younger families carry more student loan debt. Let’s take a closer look.
Ridofranz
Percentage of families with debt: 81%
Total median debt per household: $39,200
For the millennials, education debt reigns. Forty-four percent of young households hold student loan debt compared to 28.3% with mortgage debt. This tells us that people in this age range are likely putting off home ownership due to the burden of student loans. The median student loan debt was $18,500 while the mean student loan debt was $33,000. That can add up to a hefty monthly payment that could discourage taking on a mortgage loan as well.
Nearly half of millennial households are also carrying a credit card balance from month to month at a median of $1,400. Paying interest on high credit card balances can quickly eat away at income — and savings.
shironosov/istockphoto
Percentage of families with debt: 86.2%
Total median debt per household: $93,700
As you can see, families in this age range have taken on more debt. In this bracket, education debt has increased (median: $20,000) but the percentage of families with student loans has dropped to 34%. Instead, mortgage debt accounts for much of the overall debt increase. Fifty percent of households have mortgage debt in this age bracket, with a median housing debt of $93,700. Their credit card debt is climbing too, with 49% carrying a median $2,500.
These increases show that people in this age range are taking on more debt — likely because they’re earning more and doing more: they’re settling into their careers, buying houses, and starting families.
Jacob Wackerhausen/istockphoto
Percentage of families with debt: 86.6%
Total median debt per household: $89,900
Most households that are firmly in middle age continue to hold debt, but the amount of debt is much less than younger households. Fewer hold student loan debt (24%, median: $20,000), and about the same number have mortgages (53%), but the amount they owe is less (median: $125,000).
There are a couple of possible explanations for this: one is that they’re earning more and have had more time to pay off their student loans and mortgages. The other is that this generation missed some of the soaring higher education costs that younger generations have had to grapple with.
They also likely entered the workforce and established their careers before the recession, while younger generations are more likely to have been hit hard by career-stalling hiring freezes and wage cuts as they were just starting out. In short, this generation and those in older households haven’t necessarily had to depend on financing as much as younger generations to get their adult lives started.
Drazen Zigic/istockphoto
Percentage of families with debt: 77.1
Total median debt per household: $69,000
This age bracket continues to see drops in overall debt. They owe less on their mortgages and even less on education loans. With fewer large expenses related to education, housing, and family rearing, households in this age bracket can focus on paying down debt and building savings as they prepare for retirement.
(Learn more: Personal Loan Calculator)
PeopleImages/istockphoto
Percentage of families with debt: 70.1%
Total median debt per household: $42,000
Households in this age range are likely beginning to or have begun their retirement. At this point, they are probably tightening their budgets to live on retirement savings, pensions, and social security. As a result, they’re spending — and borrowing less.
Despite lower mortgage and education debt, 42% of households are carrying a pretty high balance on credit cards (median: $2,500). This suggests that for smaller purchases, people rely heavily on this convenient, yet high-interest form of borrowing.
g-stockstudio/istockphoto
Percentage of families with debt: 49.8%
Total median debt per household: $20,600
Seniors in this bracket are most likely retired and living on a fixed income. At this point, a good rule of thumb is to have little to no debt. While there are fewer and lower levels of borrowing in this bracket compared to the others, close to 50% are carrying debt. While much of this is accounted for by small mortgages, some of it may be related to high cost of medical care and senior living facilities.
Jacob Wackerhausen/istockphoto
Americans have clearly become accustomed to borrowing in order to move through their everyday lives. In fact, financing is often a necessary step in order to get the graduate level training needed for a professional career or to buy a home that will become a financial asset. But are we culturally becoming too comfortable with borrowing larger and larger sums of money? And how do you know when you’ve over-extended yourself?
One way to find out if you’re carrying too much debt is to calculate your debt to income ratio by dividing your monthly debt payments by your monthly income. For instance, if your total debt payments (student loan, credit card, mortgage, car loan, etc.) come to $2,500 per month and your after-tax monthly income is $8,000, your debt-to-income ratio would be 31.25%. That means that a little over 31% of your income goes straight to your debts.
As a rule of thumb, the lower your debt to income ratio the better: a ratio of around 30% is considered very good, while a ratio of 40% or higher could threaten your financial security.
Doucefleur/istockphoto
Carrying debt is enormously stressful, especially if it keeps you from being able to save enough to feel financially secure. Here are some solutions if you’re looking for a strategy for paying down your debt.
Make a Debt Inventory
Start by listing out all of your outstanding debts and sorting them based on whether they are “good” debts (debts taken out to help build wealth or income potential like mortgages and student loans) or “bad” debts (high interest loans and loans to buy things that don’t appreciate like credit cards and auto loans). The bad, or high-risk debts will be the ones you’ll want to take on first.
Create a Debt Pay-Down Goal
Zero in on the loans that cost you the most (in terms of high interest, but also high stress). Then, set a realistic goal for paying it down — as well as a budget for how to swing the extra payments. For instance, you might cut back on some of your unnecessary spending for a set period of time, or choose to take on a side hustle to earn some extra income.
Consider Consolidating Your Debt
If you are carrying a high credit card balance or other high-interest debt, but have a steady income and good credit, you may be able to make your repayment simpler and cheaper by taking out lower-interest personal loans to pay off those debts. You can’t use an unsecured personal loan to consolidate student loan debt, but it can be immensely helpful if you’re trying to get out from under credit card debt.
Likoper/istockphoto
Many Americans have debt, with younger people having more student debt and those in midlife having more in the form of mortgages.
If you’re concerned about managing your debt (especially from credit cards), you might consolidate your high-interest debt into one monthly payment, which might offer a lower interest rate that could help you get out of debt sooner.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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