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Sole member personal loan for business startup expenses and I want the loan payments to by assumed by the LLC now that it has income

I took out a personal loan to fund the capital expenses of a single member LLC that I setup for real estate purposes. Funds came to my personal account and were transferred to my business account, recorded in QB as Owner Equity Investment. Now that the project has positive net income, I would like the LLC to assume repayment of this debt.

What's the best way to handle this? Should these monthly payments just be added as an Owner's Draw or should the Note Payable be moved to the LLC?

If recorded as an Owner's draw, does this have any adverse tax implications? Since it's a single member LLC it's taxed as a sole proprietorship. 

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Best answer 10-15-2018

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Established Community Backer ***

Should these monthly payments just be added as an Owner's...

Should these monthly payments just be added as an Owner's Draw

yes

If recorded as an Owner's draw, does this have any adverse tax implications?

no

As a sole proprietor you are taxed on the net profit from the LLC, regardless of whether you take the funds out of the LLC



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Established Community Backer ***

Should these monthly payments just be added as an Owner's...

Should these monthly payments just be added as an Owner's Draw

yes

If recorded as an Owner's draw, does this have any adverse tax implications?

no

As a sole proprietor you are taxed on the net profit from the LLC, regardless of whether you take the funds out of the LLC



Not applicable

Separate Entity and Legal Liability In general, the purpo...

Separate Entity and Legal Liability
In general, the purpose of forming a limited liability company is to create a legal separation between the assets of the company and the personal assets of the owner. This means that if the company has a debt or a judgment against it, the so-called “corporate veil” can shield the owner’s house, car and personal monies from the company’s creditors. Where there is only one owner, there is a risk that the company will be seen as a sham and a court can pierce the veil and access the owner’s personal assets. In order to receive the legal protection of limited liability, the owner must treat the company as a separate entity, not as a personal bank account.
Loan Terms
In order to preserve limited liability, a loan from a member to an LLC must be in the business interests of the company and must be at a reasonable rate of interest. This means that the company must have an actual business need for the money and that the rate of interest at which it pays it back must be within market rates. In addition, there must be a set term for the loan and a payment schedule set and adhered to.
Loan Documentation
Any loan from a member to the LLC must also be documented by a promissory note that evidences the principal amount of the loan and its term and interest. The note must be signed by an officer of the company. If the single member LLC has only one employee, then the owner must sign in his or her capacity as an officer. The loan must then be entered into the company books and characterized as a loan from a member.
Repayment
When a member makes a loan to an LLC, he becomes a creditor of the company and must be repaid along with other creditors of the company. A loaning member should not choose to repay their own loan in preference to other debts of the company, as this may give rise to an allegation of self-dealing, which would negate the shield of limited liability. The same applies in a bankruptcy proceeding, where an excess of loans from a member may be characterized as an attempt by the member to place their ownership interest at the same level as a lender, which a court may invalidate.

Sorry it's long but this is complicated legally. Also with this in place you may enter as a loan and write off interest. It can also be written off as start up costs.
Established Community Backer ***

"recorded in QB as Owner Equity Investment." That would b...

"recorded in QB as Owner Equity Investment."

That would be correct; you cannot loan to/from yourself, in this entity type.

"or should the Note Payable be moved to the LLC?"

There really cannot be a loan between you and your LLC, for a disregarded entity. However, the Banker can help you determine if they are willing to loan in the name of the LLC only. Most often, they make you sign Both ways, as the individual on the hook in case of LLC failure, so there isn't an opportunity for them to take a loss with this risk.

If this is a Secured Loan, such as, against Property titled to the LLC, they typically NEED that to be in the name of the LLC (or, again, your name as both the borrower and the co-signer).

You can talk to your Bank about this.

None of this precludes that interest expense from being Business, by the way. You can talk to your CPA about this.


Not applicable

I was under the impression that this interest could not b...

I was under the impression that this interest could not be expensed if this was a personal loan (to owner not LLC). Is that incorrect?

If I can expense the interest, could I just split the payment between Owner's Draw (for principal) and Interest Expense? I'll be making these payments monthly from the business account to the loan acct (just added as a payee).
Established Community Backer ***

Fulton when you use owner draw, you are not dealing with...

Fulton
when you use owner draw, you are not dealing with a loan as far as the business is concerned.  
the loan was to you personally, and you personally take funds from the business and make a payment.
Whether or not you get to deduct interest expense is dependent on the loan and your personal income tax form schedule A if you itemize deductions.
Established Community Backer ***

"I was under the impression that this interest could not...

"I was under the impression that this interest could not be expensed if this was a personal loan (to owner not LLC). Is that incorrect?"

Not necessarily. If the purpose is a Business Purpose, then it is a Business Expense. For example: You buy a Road Grader, because you are a Paving Contractor.

"If I can expense the interest, could I just split the payment between Owner's Draw (for principal) and Interest Expense?"

The disregarded entity might be able to track this as a Liability in the QB data file, even though it is not in the name of the LLC. A Disregarded entity for tax filing purposes doesn't not really report a Balance Sheet.

"I'll be making these payments monthly from the business account to the loan acct (just added as a payee)."

Do NOT get your guidance for Life Issues from the Internet. Go to your own CPA.

You first asked about having the LLC "assume" the loan payments. We have reviewed that there are a Lot of issues, which come into consideration, and this is really a request for Legal and Tax Rule Guidance, not "how do I use QB for this."

Once you know what it will be treated as, we can help you with the QB part.
Community Contributor *

No one mentioned or asked this but if he spent the loan o...

No one mentioned or asked this but if he spent the loan on business startup / capital whatever those funds were spent on would have been entered into the business books and offset to Owner Contribution whether expenses or fixed assets - they still belong on the business books.  The loan no since it's a personal loan but any personal funds spent for the business yes.  Then of course yes, the payments to the loan would be a Draw if paid out of the business account.
Established Community Backer ***

Yes, it is covered in the guidance here.

Yes, it is covered in the guidance here.
Community Contributor *

Well good - consider it covered again

Well good - consider it covered again