Partners in limited liability companies may consider a cash infusion to help the business grow. Whether it is for new equipment, covering unexpected expenses or expanding the business, many situations may benefit from a partner with money to lend and a willingness to lend it. Personal loans of this nature are not much different than bank loans -- precisely the key to making them.
Make the Loan Legitimate
Loans from an LLC partner to the company should be no different than bank loans. Details of the loan should be put in writing. Any collateral or consequences for default should be detailed in advance, as well as payment terms and interest rates. The payment schedule needs to be specified and followed. Details for late payments or missed payments can be added to further mimic a typical bank loan. It is best to include anything a bank loan might have, but this mechanism does provide extra flexibility for both the LLC and the business partner.
Flexibility Makes it Easier
Making a loan to a LLC can offer terms that work great for both parties. The LLC might need a six-month term free of payments or interest, which can be written into the terms of the loan agreement. Additionally, interest-only payments can be made for an extended amount of time and smaller low-interest monthly payments can be extended to the LLC in situations where a commercial bank might say no. Loans can be secured or unsecured as long as all partners are in agreement, but unsecured loans can make things easier in the event of a sale or closure.
Interest and Principal
There are two things to consider with a loan to an LLC. First the principal should be less than the equity that has already been put into the business. The government may consider the loan to be a capital investment if the principal amount is too large, in which case any loan repayment may be determined to be dividend payments regardless of the intent. In addition, it is best to charge interest that is of "fair market value" to avoid any IRS scrutiny.
Just like any shareholder loan, these types of loans may bring tax advantages. The primary tax advantage is that while the interest that is charged has to be claimed as income, at least the LLC can deduct the interest as an expense. It can be a solid investment opportunity in something that the lender has a vested interest in. The interest alone can outperform bonds, CDs and many other conservative investments.
Craig Keolanui is a small business entrepreneur with more than 23 years of experience owning and operating small businesses in the restaurant, business services and retail industries. He works as a small business consultant assisting with finance, marketing, planning and business writing projects and requirements.