The Benefits of Adding Money to Your LLC by Making a Loan

The Benefits of Adding Money to Your LLC by Making a Loan

A question that often comes up with clients who conduct their business through a limited liability company is how to most efficiently add money to the business.

By default, many business owners assume that making a cash “contribution” to their LLC is the normal and most efficient way of doing it. Under Michigan law, each member or a particular group of members could make a contribution as needed. However, this “contribution” approach can cause fluctuations in each members’ capital accounts (i.e. the account that records contributions, distributions, shares of profit and loss, etc.). More significantly, these changes can create unintended consequences in the amount of ownership each LLC member has. This can affect how profits are divided and voting in some cases.

To avoid these issues, an alternative approach is making a loan to the LLC. The main benefit of the “loan” approach is that neither the members’ capital accounts or ownership interests change. They aren’t affected in any way by loan. Another benefit is that the loaning member will have a more secure position of being paid back (as a “lender”). This is because a lender is paid back “before” an owner in a LLC. And finally, making a loan adds an additional financial benefit to the LLC. Interest on the debt will likely be tax deductible to the company.

Now, a word of caution: proper documentation is necessary to define the terms of the loan (i.e. loan amount, interest rate, repayment terms, default provisions, etc.). So, these issues need to be put in writing to formalize the loan. If you’re interested in learning more about this approach or using it to provide additional funds to your LLC, feel free to contact me.

Author(s)

Cunningham Dalman, PC publishes this web site and its component parts to inform users about our firm, our attorneys and general new developments in the law. The web site and blogs are not intended as legal advice on any matter. There are many factors that may affect your situation. You should not act or refrain from acting because of information found here without first seeking appropriate legal or other professional advice from someone who is familiar with your particular circumstances.

In the operation of this web site and our blogs, we do not intend to create an attorney-client relationship with you and no such relationship shall be created by your use of this web site. Such a relationship can only be established to the extent an attorney at Cunningham Dalman, PC expressly agrees to undertake the relationship. Please do not communicate to us any information you regard as confidential unless and until we have established a formal attorney-client relationship with you. Any information you send to us before we establish an attorney client relationship may not be privileged or confidential. Information you send to us over the Internet may not be secure.

 
Attorneys...
Our Practice Areas
Our Practice Areas

Recent Posts

Contact

Cunningham Dalman P.C.
PO Box 1767
321 Settlers Road
Holland, MI 49422-1767

Google Map

 

Scroll to Top

Tell Us How We Can Help You

Send us a quick message or call us at 616.392.1821!

Seminar Registration

Fill in the form below to reserve your spot today for each person attending. If you have any questions, please call the office at 616.392.1821.

Call Now Button