Making a loan to an limited liability company is similar to making a personal loan to a friend or a sole proprietorship. Be sure to record the loan in writing and carefully consider the terms of the loan as well as how you will handle recovery of the loan if the LLC is unable to repay you. If you are making a loan to your own LLC, you will need to take special precautions to avoid any showing of impropriety.
Basic Loan Terms
In your written loan agreement you will need to include the amount of the loan, the interest rate, how interest is compounded, when interest starts to run and what, if any, property will be considered collateral for the loan. If the LLC your are lending the money to does not have any property that can be used for collateral, you may consider accepting an ownership interest in the LLC as collateral as long as the LLC has regular income and a viable business model.
Repayment Options
After drafting your basic loan terms you will need to create the terms of repayment. Consider when repayment will begin, how often payments will be due, when payments will be made, the overall length of the term of the loan and how you will deal with late payments or bounced checks. You may also consider adding a grace period or late term penalties in your loan agreement. In case the LLC defaults on the loan, you may wish to consider if you will enforce the loan through arbitration, mediation or court.
LLC Signatories
When selecting who will sign the loan agreement on behalf of the LLC, make sure that the signatory has authority to bind the LLC. LLC members and managers are generally authorized to act on behalf of the LLC. Additionally, you may consider asking the signatory to sign individually and on behalf of the LLC. This way, if the LLC defaults on the loan you can hold the individual personally liable for the balance of the loan. In the same regard you may also consider having a co-signor sign the loan in order to ensure repayment.
Making a Loan to Your Own LLC
If you are loaning money to your own LLC, you should make sure that you have the explicit approval of all of the LLC members. In addition to a standard loan agreement, you should have the LLC members sign a document stating that they consent to the loan. After the documents have been executed you should write a check to your LLC and make sure that your loan is reflected in your LLCs financial ledger.
References
- Rocket Lawyer: Loan Agreement
- Zimple Money: How to Make a Loan
- Keyt Law: How Do I Loan Money to My LLC?
- Entrepreneur: LLC Basics
- Debt.org. "What Is a Loan Agreement?" Accessed Oct. 23, 2020.
- U.S. Department of Education Federal Student Aid. "The Standard Repayment Plan is the basic repayment plan for loans from the William D. Ford Federal Direct Loan (Direct Loan) Program and Federal Family Education Loan (FFEL) Program." Accessed Oct. 23, 2020.
- Corporate Finance Institute (CFI). "Amortization Schedule." Accessed Oct. 23, 2020.
- Consumer Financial Protection Bureau. "What is a prepayment penalty?" Accessed Oct. 23, 2020.
- Consumer Financial Protection Bureau. "Loan Estimate and Closing Disclosure: Your guides in choosing the right home loan." Accessed Oct. 23, 2020.
- Consumer Financial Protection Bureau. "What is a balloon payment? When is one allowed?" Accessed Oct. 23, 2020.
- Accion.org. "2 Different Types of Personal Guarantees Your Business Needs to Understand." Accessed Oct. 23, 2020.
- Consumer Financial Protection Bureau. "Know what is negotiable." Accessed Oct. 23, 2020.
Writer Bio
Louis Kroeck started writing professionally under the direction of Andrew Samtoy from the "Cleveland Sandwich Board" in 2006. Kroeck is an attorney out of Pittsburgh, Pennsylvania specializing in civil litigation, intellectual property law and entertainment law. He has a B.S from the Pennsylvania State University in information science technology and a J.D. from Case Western Reserve University in Cleveland, Ohio.