Do I need a promissory note when I lend my own LLC money?

Yes. The IRS scrutinizes loans between owners and their entities closely. A written note with market terms is the primary evidence that the transfer is a loan (creating a debt the entity must repay) rather than a capital contribution or a disguised distribution. Without it, the IRS can recharacterize the transaction.

What interest rate should I charge?

At minimum, the Applicable Federal Rate (AFR) for the loan term. Below-market loans between owners and entities trigger imputed interest under IRC Section 7872, plus possible recharacterization. The AFR is published monthly by the IRS at three tiers (short, mid, long-term). Going above AFR is fine; going below creates tax friction.

How does the loan affect my basis in the LLC?

For an S-corp, a direct loan from the shareholder to the corporation increases the shareholder's "loan basis," which is separate from stock basis but can be used to absorb losses. For an LLC taxed as a partnership, a member loan is generally not basis-creating; the loan is treated as recourse or nonrecourse debt and follows partnership rules. Talk to a tax pro before relying on this.

Can the LLC repay the loan with cash from operations?

Yes, and that is the cleanest treatment. Repayment of principal is not income to the lender (it is return of capital). Repayment of interest is taxable interest income to the lender. The LLC deducts the interest as a business expense (subject to interest limitation rules under IRC 163(j) for larger entities).

What if I never get paid back?

For an S-corp shareholder, an unrepaid bona fide loan can become a non-business bad debt deduction (short-term capital loss, with limits) when the loan becomes worthless. For an LLC member, the treatment depends on the loan structure and tax classification. Either way, having a properly documented note is essential to claiming the loss.

What about "thin capitalization"?

The IRS can recharacterize debt as equity if the debt-to-equity ratio is too high or if the loan does not look like a real arms-length loan. Factors: written documentation, market rate of interest, fixed maturity date, scheduled payments, security/collateral, treatment as debt on the books, and intent. A real promissory note ticks most boxes.

Can I lend to my single-member LLC (disregarded entity)?

Technically you can sign the note, but for tax purposes a single-member disregarded LLC is the same as you. The "loan" is not a transaction the IRS recognizes for income tax purposes (no interest income to recognize, no deduction). The LLC and the owner are the same taxpayer. Document the transaction internally for state-law and accounting purposes if needed.

Should I take collateral from my own LLC?

Often yes for arms-length appearance. Pledging specific business assets (equipment, accounts receivable, inventory) and filing a UCC-1 makes the loan look like a real loan and gives you priority over future creditors. Without collateral, your loan is unsecured and ranks behind secured creditors in any bankruptcy.

Lending to Your Own LLC or Small Business

You bootstrap your LLC or S-corp, the business needs cash, and your savings account is the closest source. Most owners just transfer money in and figure they will sort it out at year-end. That casualness is the single most common cause of recharacterization audits, where the IRS treats the "loan" as a contribution or distribution and triggers tax consequences neither side expected. A real promissory note with market terms costs nothing and prevents the entire issue.

Why the IRS cares

Owners can move money to and from their entities easily, so the tax code distinguishes:

Loan: a debt the entity must repay. Principal flows through with no tax impact; interest is income to the lender and deductible to the entity.
Capital contribution: equity. Owner basis goes up but the money is not "owed back."
Distribution: cash flowing from entity to owner. Tax-free up to basis (S-corp) or capital account (partnership), then taxable.

Whether the IRS treats your transfer as one of these depends less on what you call it and more on whether the transaction looks like the thing you call it. A loan with no documentation, no fixed term, no interest, and no repayment plan does not look like a loan. The IRS can recharacterize and create a tax bill.

The 7-factor test for "real loan"

Tax courts look at multiple factors, not all required, to decide whether a transfer between owner and entity is debt or equity:

Written promissory note evidencing the obligation
Fixed maturity date
Stated interest rate at or above AFR
Scheduled payments
Source of repayment identifiable (operating cash flow, not contingent on profits)
Security/collateral
Treatment as debt on the entity\'s books and tax returns

You do not need all seven, but you need most. The promissory note and AFR-or-above interest are the two heaviest factors.

The Applicable Federal Rate (AFR)

The IRS publishes monthly AFRs in three tiers:

Short-term: loans of 3 years or less
Mid-term: loans over 3 years and up to 9 years
Long-term: loans over 9 years

The rate at the date of loan origination applies for the life of the loan (so long as the loan is not modified). Searching "IRS AFR [month] [year]" pulls up the current table.

Charging less than AFR triggers IRC Section 7872 imputed interest: the IRS treats you as having received interest at AFR (taxable to you) and the LLC as having paid interest (potentially deductible to it). Net effect for a single-owner LLC: probably wash, but with paperwork. Cleaner to charge AFR or above from the start.

Drafting the loan

Use a real promissory note. Common terms for owner-to-LLC loans:

Lender: you, individually
Borrower: the LLC, identified by full legal name
Principal: the actual amount transferred
Interest: at or above AFR for the chosen term
Term: a fixed maturity date (5 years is common for working capital, 10+ for major purchases)
Payment schedule: monthly or quarterly interest, balloon principal at maturity is fine; or installment with full amortization
Security: optional collateral on specific business assets, perfected by UCC-1
Default: standard remedies including acceleration
Signatures: lender (individually) and borrower (by manager/officer of the LLC)

The signature on the LLC side should be by an authorized person (managing member, manager, or officer) signing in their representative capacity, e.g., "ABC LLC, By: [Name], Manager."

Treatment on the LLC books

Record the loan as a liability on the balance sheet (Loan Payable - Member [Your Name])
Each interest payment: reduce the liability if amortizing, charge interest expense on the income statement
Issue 1099-INT to yourself if the LLC paid you $10+ in interest in the year (if classified as a business of lending; for a single owner-lender, may not be strictly required, but cleaner to do)
Report interest paid as a deduction on the LLC tax return
Keep the original signed note in the company records

Treatment on your personal return

Interest received reported on Schedule B (Interest and Ordinary Dividends)
Principal received is not income; tracks the basis of the loan
S-corp loan basis: separately tracks the loan principal as basis available to absorb pass-through losses
If the loan goes bad: typically a non-business bad debt deduction (short-term capital loss subject to limits)

Single-member LLC nuance

A single-member LLC that has not elected corporate tax status is a "disregarded entity" for federal income tax. You and the LLC are the same taxpayer. A "loan" from you to your disregarded LLC is not a tax-recognized transaction.

You do not recognize interest income (it is paying yourself)
The LLC does not deduct interest
For state-law purposes, the loan is real; the LLC owes you
For accounting purposes, you may still want to track it (especially for partnership conversion or sale of the LLC)

If your single-member LLC has elected corporate (S-corp or C-corp) tax treatment, the loan is real for tax purposes and follows the rules above.

Multi-member LLC nuance

For a multi-member LLC taxed as a partnership, a loan from one member is treated as third-party debt of the partnership for many purposes. The lender-member:

Recognizes interest income
The LLC deducts interest as ordinary business expense
The loan affects partnership debt allocation; recourse vs nonrecourse depends on whether other members are liable on the loan
Capital account treatment depends on whether interest is paid from operating cash or net income

For partnerships, a real promissory note is essential to keep the loan separate from a capital contribution.

Avoiding constructive distribution

If the IRS recharacterizes your loan as a constructive distribution (S-corp) or a disguised distribution (partnership), the consequences:

S-corp: distribution treated as taxable to the extent it exceeds basis; reduction in stock basis
Partnership: distribution may trigger gain if it exceeds basis
Repayments may be treated as additional distributions or contributions, not principal repayment
Penalties and interest if the IRS adjusts in a later year

The defense is consistent: document the loan, charge real interest, repay regularly, and treat it as debt on the books.

Tools

Loan Payoff Calculator for setting payment schedules
Usury Limit Checker for state usury caps (rare issue for owner loans but worth checking)
Statute of Limitations Lookup

Get the note done right

A real, state-specific promissory note with market interest, fixed term, and scheduled payments turns a transfer into a documented loan. Done in minutes.

Installment Promissory Note - $7.99 → All Note Types