The lone member of a single member limited liability company can lend money to the corporation. However, for the member to maintain her position as a creditor, instead of an investor in the transaction, she must make sure that the transaction is well-documented and transparent. This information would include stating specifically what the loan is being used for and how it will be paid back. Failure to document this information could result in the member losing her right to collect what is owed to her in case the single member LLC folds.
Creditor vs. Investor
Assets are liquidated if the single member LLC is forced to dissolve the firm by filing a Chapter 7 bankruptcy and are used to pay creditors at least a portion of what they are owed. A single member properly loaning money to her LLC can be considered a creditor and be eligible to receive at least some funds back from a liquidation provided the sale of assets covers at least a portion of the LLC's debt. However, a single member loaning money to her LLC could also be viewed as an investor and will only be able to recover any money once all the other creditors are paid first. The special relationship a single member LLC has with its owner tends to be scrutinized closely by bankruptcy courts and the IRS.
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The loan documentation should be completed as if the arrangements were being made with a commercial bank. There should be a verifiable business purpose such as purchasing equipment, inventory, or meeting cash flow needs for a person to lend her single member LLC money. Receipts and financial statements should be put together to show that the money was used as intended. All documents should be properly signed and initialed by the sole proprietor acting on behalf of herself and the LLC.
Part of a loan agreement includes payment terms and the rate of interest, to be determined by current market rates for similar loan arrangements, which will be charged. A sole proprietor lending money to her single member LLC cannot leave these arrangements open-ended if she wants the funds to be treated as a loan rather than an investment. The LLC must also pay back the loan under the agreed-upon terms to remain in good standing.
A promissory note should be written stating that the single member LLC will pay back the sole proprietor under the terms of the loan agreement. The note guarantees the obligation and is an accepted accounting method to recognize the loan agreement and allow it to be inserted into the operating budget and financial statements as a liability.