[UT] What legal issues should I consider before lending my own money to an LLC I primarily own?

UT Business

Blake

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Thank you for clarifying. Lending money to your own single-member LLC can be an effective way to capitalize the business while preserving legal clarity, but there are several important considerations.

Formal Loan Documentation
A written loan agreement is essential. Even though you own the LLC, the transaction should be treated as arm’s length. The agreement should include principal amount, interest rate (compliant with Utah usury laws), repayment schedule, maturity date, default terms, and any collateral.
Separate Records and Accounting
The loan should be reflected in the LLC’s books as a liability, and all payments should move through separate bank accounts to avoid commingling.
Interest and Tax Treatment
The IRS expects interest to be charged at a market rate. Interest income is taxable to you personally, and the LLC may be able to deduct the interest depending on use.
Respect the LLC’s Separate Existence
Execute the agreement as an individual lender and as manager/member of the LLC, signing in both capacities.
Banking and Transfers
Transfer funds from your personal account to the LLC’s account with clear notation that the transfer is a loan.
Default Terms
Even in owner loans, default provisions matter for enforceability, audits, or bankruptcy.
Future Investors or Creditors
Proper documentation avoids confusion between capital contributions and loans.
Utah Law Compliance
Utah allows member loans, but interest must comply with Utah Code § 15-1-1. If not specified in writing, the default limit is typically 10%.

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Are there any substantial legal considerations I should be aware of before lending money to the LLC that I am the primary owner of?

Lexi, Chatbot

I understand your concern about lending money to your LLC. Have you already discussed this with a legal advisor?

Not yet, this is the first step.

Lexi, Chatbot

Are you looking for information on potential risks or legal implications of lending money to your LLC?

Yes.

Lexi, Chatbot

Is there anything else the Lawyer should know before I connect you? Rest assured they’ll be able to help with your lending concerns.

Just that I am looking to fund an LLC (single owner) that I am the sole member of, and would like to do this through a loan. I am creating a loan agreement to make sure it is all in writing and has all information associated with the loan, including principal amount, interest, payment terms, and conditions.

Blake

Hello, my name is Blake and I am a licensed attorney. I will be happy to help you today. Please keep in mind that this conversation is for informational purposes only and does not establish an attorney-client relationship or constitute legal advice.

First of all, how long ago did this happen, and where was it located?

This has yet to happen, and will be located in Salt Lake City, Utah.

Blake

Formal Loan Documentation
A written loan agreement is essential. Even though you own the LLC, the transaction should be treated as arm’s length. The agreement should include principal amount, interest rate (compliant with Utah usury laws), repayment schedule, maturity date, default terms, and any collateral.
Separate Records and Accounting
The loan should be reflected in the LLC’s books as a liability, and all payments should move through separate bank accounts to avoid commingling.
Interest and Tax Treatment
The IRS expects interest to be charged at a market rate. Interest income is taxable to you personally, and the LLC may be able to deduct the interest depending on use.
Respect the LLC’s Separate Existence
Execute the agreement as an individual lender and as manager/member of the LLC, signing in both capacities.
Banking and Transfers
Transfer funds from your personal account to the LLC’s account with clear notation that the transfer is a loan.
Default Terms
Even in owner loans, default provisions matter for enforceability, audits, or bankruptcy.
Future Investors or Creditors
Proper documentation avoids confusion between capital contributions and loans.
Utah Law Compliance
Utah allows member loans, but interest must comply with Utah Code § 15-1-1. If not specified in writing, the default limit is typically 10%.

That’s great. When receiving money from friends or family as a loan, is it better to have the loan directly with the business or with myself and I then loan money to the business?

Blake

That’s an excellent question.

Loan Directly to the LLC (Generally Recommended):
This keeps liability with the business, preserves the corporate veil, and simplifies accounting. Friends or family may request a personal guarantee if they want added security.

Loan to You Personally, Then to the LLC:
This may reassure lenders who trust you personally, but it makes you personally liable and requires two separate loan agreements. It can also blur the line between you and the LLC if not handled carefully.

Best Practice:
If the funds are intended to capitalize the business, it is usually better for the loan to be made directly to the LLC, possibly with a personal guarantee if needed.

Does that clarify things?

Sounds great, thanks!

Blake

You’re very welcome. I’m glad I could help.

Blake

8,244 satisfied customers

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