Many LLC members and owners don’t realize they have certain benefits associated with being a part of an LLC. If you are in a bind, you can actually borrow from an LLC. There are certain requirements and tax penalties may play a role, but much of that can be worked out if you follow certain steps. Before you request a loan, you should consider what options you have and what risks, if any, may apply. Your financial stability, as well as that of the LLC, will depend on it.
Can Money Be Borrowed From an LLC?
The simple answer is yes. The complicated answer is that borrowing money from an LLC is a process. You will have to apply for the loan just like you would at any other lending institution. The LLC members will have to approve the loan. Once the loan is approved it will have to be reported in put into minutes at the next LLC meeting. The LLC must draw up a contract that can be legally enforced. The contract will need to include all of the details including the total amount loaned as well as the schedule for repayment.
Are There Tax Implications for Borrowing From an LLC?
Borrowing money from an LLC does have tax implications, especially if the loan is written so that it looks like a taxable distribution. This can occur for a couple of reasons. The first is that the amount you are trying to borrow is more than how much you have contributed to the LLC. This would result in a taxable gain and would be classified as such by the IRS. If the loan is cancelled, it would also result in taxable gains and be taxed by the IRS. The interest must be paid on a monthly or quarterly basis.
Is It a Good Idea to Borrow From an LLC?
Borrowing from your own LLC does have its advantages. There are other avenues you can choose. It’s a good idea to look closely at each one. Business funding is available and may actually be a better choice. If you do choose to borrow from your business, it’s essential that everything is documented properly. As long as all approvals are granted and everything is recorded in the LLC’s minutes, everything should go smoothly.
What Are the Drawbacks?
Most of the drawbacks have to do with the loan eventually being taxed. As long as you make sure everything is documented and approved by other LLC members, things should go smoothly. The key is to maintain the loan’s status so the money you receive doesn’t fall under a taxable distribution and qualify as taxable gains. If you can do this, there shouldn’t be any problems with the IRS. Borrowing money from your LLC is a good decision if you have a plan in place to make sure that both you and your business remain financially viable. Follow the guidelines so that all of the requirements are met and both you and your company may benefit in the long run.