Owner Contribution or Loan to Your LLC: How to Record It

Is money I put into my LLC a contribution or a loan?

Money you put into your LLC is a contribution (equity) unless it is a real loan: a debt the LLC is legally bound to repay, that both sides intend to be repaid, with you as a true creditor. The books follow that choice. A contribution goes in an equity account. A loan goes in liabilities.

If you are the only member and have not elected corporate treatment, income tax ignores the LLC, so a loan to yourself is only a label for income tax. The choice matters once there is a second member, a corporate election or a foreign owner.

Whether a transfer is a loan or capital depends on all the facts. The IRS lists three requirements before it allows an interest deduction on a business debt, and they show what a real loan looks like: the borrower is legally liable, both sides intend repayment, and there is a true debtor-creditor relationship (Publication 334).

A case stops being simple when:

• the LLC has more than one member, because capital accounts and basis follow each member;
• money moved with no note, no agreement and no clear memo;
• members put in unequal amounts;
• a repayment is planned, especially years after the money went in, or a buyout is coming.

Gather the operating agreement, the dated bank transfers, any note, and the equity or capital account ledger.

Can I lend money to my own single-member LLC?

For federal income tax, a loan to your own one-member LLC has no separate effect. An LLC with one member that has not elected corporate treatment is disregarded: the IRS treats its activities as your own sole proprietorship, so the money is yours on both sides (IRS; 26 CFR 301.7701-2). Its income and expenses generally go on your own return, on Schedule C, E or F. Owners usually record their own funding as a contribution. A genuine debt the LLC keeps in its own books (a note, repayments) need not be changed to equity just because income tax ignores it.

Two changes flip this answer:

• The LLC elects corporate treatment on Form 8832 or Form 2553. It is then a separate taxpayer and a loan can be real debt. The election is a deemed transfer of the LLC's assets and liabilities to the corporation for stock (26 CFR 301.7701-3(g)), so have a preparer check money booked as a loan before it. A Form 8832 election cannot take effect more than 75 days before it is filed or more than 12 months after (Form 8832). Form 2553 is due 2 months and 15 days after its tax year begins, or any time in the year before (instructions). Missed one? See late LLC tax election relief or late S corporation election relief.
• Another person puts in money for a share of ownership. The LLC becomes a partnership, and money paid into the LLC is a contribution to a partnership. If the new member instead pays you for part of your interest, the money goes to you, not the LLC, and may be taxable to you (Publication 3402).

An LLC is formed under state law (Publication 541), so whether a note matters to a bank or a court is outside this page.

If you booked owner funding as income, correct it with a reclassifying entry to equity rather than deleting it, and keep the bank record; if a filed return counted it as income, ask a preparer first. If it was booked as a loan with no note, decide from the agreement, the repayment history and other evidence whether it was debt or capital before you change it. The label changes nothing for income tax while you are the only member, but it matters the day you add one or elect corporate treatment.

Which account do I use to record an owner contribution or owner's investment?

Record a contribution as an increase in equity, never as income: debit the LLC's bank account and credit an owner's contribution account. In a multi-member LLC, credit that member's own capital account.

1. Move the money by bank transfer from your personal account to the LLC's account, with a memo such as "owner contribution". The IRS suggests noting on each deposit whether it is business income, personal funds or a loan (Publication 583).
2. Debit the bank account and credit the contribution account for that owner.
3. Keep the transfer record, and any member consent the operating agreement requires.

Cash you put in is not income to the LLC. For a partnership, a contribution generally causes no gain or loss to the partnership or the member (section 721; Publication 541). For a car, computer or tools, where gain or loss and value questions can arise, see putting personal assets into your LLC.

Personal funds that paid LLC bills raise the same choice: see business expenses on a personal credit card and startup costs paid before the LLC. To set up the accounts, see LLC equity accounts.

How do a contribution and a member loan differ in a multi-member LLC?

A contribution raises the member's capital account and basis. A loan does neither as capital: it is a debt the LLC owes the member. A domestic LLC with two or more members is taxed as a partnership unless it elects otherwise (IRS), so each member has a capital account, a basis and a profit share. Spouses who wholly own an LLC as community property can choose to report it as a partnership or as a sole proprietorship (Publication 541); as a sole proprietorship, the one-member answer above applies.

Capital account and basis are different numbers. A member's tax-basis capital account may not equal adjusted basis, because basis includes the member's share of partnership liabilities, and each member is responsible for keeping a record of basis (Form 1065 instructions, item L). Basis is also figured without regard to what the books show as capital (Publication 541).

A member loan is an LLC liability. A rise in a member's share of liabilities counts as a contribution of money (section 752(a)), so a loan can change members' basis without changing capital. Whose basis changes depends on who bears the economic risk of loss on the debt, or on profit shares if no one does (Publication 541). That calculation is where professional judgment is needed.

Members who put in unequal amounts should settle in writing whether the extra changes percentages, earns interest as a loan, or is simply capital. For the full capital account method, see partner capital accounts. For a member who paid LLC bills personally, see partner-paid LLC expenses.

How do I record a loan from a member?

Record a member loan as a liability, not income and not equity: debit the LLC's bank account and credit a loan-from-member account, one for each member. Money borrowed through a bona fide loan is not income (Publication 334).

1. Sign a note when the money moves. Its terms are listed below.
2. Record the advance: debit bank, credit loan from member.
3. Record interest as it accrues: debit interest expense, credit interest payable, or cash when paid.
4. Record each repayment in two parts: principal reduces the loan account, and interest clears the interest payable or expense.
5. Keep a loan schedule showing the balance after every payment.

In a multi-member LLC taxed as a partnership, interest on a real member loan is income to that member and generally a business expense of the LLC, subject to the capitalization rules. The tax year can differ: an accrual-basis partnership generally cannot deduct an expense owed to a cash-basis partner until it is paid (Publication 541). Book the accrual; let the preparer set the tax year. The return section below says where the interest goes.

Two duties can follow the payment:

• Form 1099-INT. The LLC may need to file it for a member who lends as a creditor once a year's interest reaches $2,000 (26 U.S.C. 6041). See a family loan to your business.
• Withholding. US-source interest paid to a member who is not a US person can carry US withholding, and the LLC is liable for tax it should have withheld (26 U.S.C. 1441; 1461). See money from family abroad.

How do I pay myself back: loan repayment or draw?

A loan comes back as repayments. A contribution comes back as a draw or distribution. Which one applies depends on how the money went in.

In a one-member LLC with no corporate election, money out to the owner is a draw, unless the books carry a genuine loan that the payment repays. See recording owner's draws.

Two traps:

• Repaying a "loan" that was really capital. If a transfer was booked as a loan with no note, no interest and no repayment terms, a later "repayment" invites the question of whether it was ever a loan.
• Both in one account. When contributions and loans share an account, nobody can tell which part may be repaid and which is a distribution.

A distribution to one member only, or out of proportion to ownership, is a question for the operating agreement. Even when basis is enough, it can create ordinary income if it shrinks that member's share of unrealized receivables or substantially appreciated inventory (section 751(b); section 731(d)). Ask your preparer before the money moves.

Do I need a written note and an interest rate?

For federal income tax, a one-member LLC with no corporate election needs neither: no one else is a party. For a multi-member LLC taxed as a partnership, the IRS publications on partnerships and small businesses do not require a written note or a minimum rate for a member's loan (Publication 541; Publication 334). A signed note is still the plainest proof of a real debt, so sign one when the money moves.

A note covers:

• the lender, the LLC, the amount and the date;
• the interest rate and when interest is paid;
• the payment dates or the due date;
• what happens on a missed payment;
• signatures of the member and an authorized person for the LLC, plus any member consent the operating agreement requires.

For a multi-member LLC, a low or zero rate is a separate question. Section 7872 can treat unpaid interest as paid on certain below-market loans. A loan between a partnership and a member is not one of the named kinds, but the tax-avoidance and regulation categories turn on the facts, so ask before setting a rate at or near zero (section 7872(c)). For the benchmark rate (the IRS applicable federal rate) and family lenders, see a family loan to your business.

Where do contributions and loans show on the tax return?

A one-member LLC reports neither on its own; a multi-member LLC reports both on Form 1065.

Source: Form 1065 instructions. Smaller partnerships that answer Yes to Schedule B question 4 are not required to complete Schedule L, M-1, M-2 or item L. The books should still show each member's contributions and loans.

Owned from outside the US? A one-member LLC wholly owned by a non-US person is still ignored for income tax, but it generally files Form 5472 with a pro forma Form 1120 and reports contributions to and distributions from the entity, and amounts borrowed or loaned (Form 5472 instructions). Here the contribution-or-loan label changes what is reported, and a missed or incomplete form carries a $25,000 penalty. See transaction records for a foreign-owned LLC.

Interest paid to a member follows what the money was. A partner who lends as a creditor deals with the partnership other than as a member; the regulation names loans from a partner, and the lender is treated as an outsider (section 707(a); 26 CFR 1.707-1(a)). Business interest then generally goes on Form 1065 line 15; rental, investment and capitalized interest follow other rules. A payment for the use of capital that is set without regard to profit is a guaranteed payment (section 707(c)): the Form 1065 instructions send it to line 10 and K-1 box 4b, not the interest line, and it is generally deductible when accrued (Form 1065 instructions; Publication 541). Give the preparer the note and say which transfers are loans, so the return follows the facts.

What if my LLC is taxed as an S corporation?

An LLC that elects S status files Form 2553 and is taxed as a corporation, so its owners are shareholders (IRS; Publication 3402). A contribution is capital and raises stock basis. A shareholder loan is tracked separately as debt basis: stock basis and debt basis are figured separately, and loans are not counted as capital contributions (Form 7203 instructions).

The return is Form 1120-S with Schedule K-1 (Form 1120-S), not Form 1065. For the loan-or-capital choice, debt basis and repayments, see shareholder loans to an S corporation; for the books after the switch, see books after an S corporation election. An LLC taxed as a C corporation follows corporate rules, not the partnership rules on this page: bring the facts to a preparer before booking a shareholder loan.

Example

These examples are illustrative, in US dollars.

One-member LLC

The owner of a one-member LLC with no corporate election moves $10,000 from personal savings into the LLC's account to cover rent. The LLC books it as an owner contribution in equity, not income. Taking $10,000 out later is a draw. For federal income tax, calling the transfer a loan changes nothing on the return, because the LLC's activity is already the owner's.

Two members, a loan

Members A and B own equal shares and the LLC is taxed as a partnership. A lends the LLC $20,000 as a creditor, on a signed note at 5% simple interest, interest paid each year, principal due after two years. The money pays ordinary business costs, and A is a US person.

• Year 1: cash rises by $20,000 and a loan from member A is booked for $20,000. The LLC pays $1,000 interest and books it as interest expense.
• Year 2: the LLC pays $1,000 interest again and repays the $20,000 principal. The loan account returns to zero.

The loan and its repayment do not change A's capital account. The $2,000 of interest lowers book profit for both members; on the return it is loan interest paid to A as an outsider, as explained above. Whether the loan changes A's basis, B's basis or both depends on who bears the economic risk of loss on it; the preparer works that out.

Two members, a contribution

Same LLC, but A contributes the $20,000. Each member's capital account stood at $50,000 before. A's rises to $70,000 and B's stays at $50,000. No interest accrues and nothing is repaid on a schedule. Whether A's profit share changes depends on the operating agreement.

If the LLC later returns $20,000 to A, that is a distribution: A's capital account returns to $50,000 and A's basis falls by the cash received. A generally has taxable gain only if the cash exceeds A's basis, subject to the section 751(b) caveat above. Booking it as a "loan repayment" would be wrong, because no loan existed.

Different for you?

• Members put in unequal amounts, or a repayment is planned years after the money went in: each member's capital account, basis and what the agreement says decide whether it is a loan repayment or a distribution. Settle what to sign before the money moves. See partner capital accounts and get bookkeeping help.
• Money moved in or out with no note, memo or agreement, a transfer was booked wrong, capital accounts were never tracked, or a return is late: which transfers were capital and which were loans has to be rebuilt from the bank records. See rebuilding partnership capital accounts and get bookkeeping help.
• You are adding a second owner, or a partner is leaving: see raising money as an LLC or buying out a partner.
• You own the LLC from outside the US: see transaction records for a foreign-owned LLC and get bookkeeping help.
• Your spouse co-owns the LLC: see spouse and family LLCs.
• Personal and LLC money are mixed together: see fixing commingled funds.
• A relative lent or sent the money: see a family loan to your business or money from family abroad.
• The LLC is taxed as an S corporation: see shareholder loans to an S corporation.