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NY state here. I have a very small single member, member managed (I'm the member) LLC that has elected to be taxed as an S-corporation (this might be important).

The LLC is running a little light on money and I'd like to put some personal money from my checking account into it so that the LLC can cover some operating expenses. I want to do this legally and aboveboard, and I would like this to be considered equity and not a loan (unless a loan is the only way to go here).

Am I allowed to put my own personal money into the LLC/S-corp and consider it an "equity investment" in the company? Is that investment taxable? What are the rules/constraints surrounding this transfer of personal money to company funds?

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    Why don't you want to contribute funds as a loan? Typically this is a cleaner way to get repaid tax-free once your corp is actually generating cash. Knowing your thinking here is necessary for a proper response.
    – Grade 'Eh' Bacon
    Sep 17 '20 at 15:07
  • Thanks @Grade (+1) According to a few articles I read, the options are: (1) equity investment or (2) loan. If you choose loan, and you subsequently have the LLC apply for a bank loan at a later time, before its paid off its loan to you, that can make the bank underwriters balk. I am not considering having my LLC apply for a loan, but if all other things are equal, I guess I'd rather go for the "safer" of the two and choose equity investment. Since who knows what the future might bring.
    – hotmeatballsoup
    Sep 17 '20 at 16:32
  • This isn't a big concern - it is unlikely a bank would ever loan a minimal LLC money without getting a personal guarantee from the sole owner anyway. This shouldn't impact the assessed risk of the loan.
    – Grade 'Eh' Bacon
    Sep 17 '20 at 16:49
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Overall, simplest way to fund a self-owned LLC is simply to loan it funds. This will allow you to receive back your funding tax-free in the future very painlessly (this may be possible with equity as well, but may be more complex).

It seems your concern is that having a loan owed to you will make a bank see your LLC's balance sheet and consider you higher risk if you want to take a bank loan out in the future. This should not be a concern, because typically a bank will not loan to an LLC without a personal guarantee from you anyway - they understand that a small LLC with minimal assets is at higher risk of going bankrupt, so when they assess the risk of the loan, they will basically be acting as if they are loaning to you directly.

The key benefit to doing this as a loan is that it is easier to do yourself, whereas contributing funds for equity needs either greater delicacy or hiring a lawyer in most cases.

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  • Thanks @Grade (+1) -- it sounds like the LLC pays me back tax-free (I don't pay taxes on it), but does the LLC pay a tax when I put the loan into its account (or at any time throughout the duration of the loan)?
    – hotmeatballsoup
    Sep 17 '20 at 16:51
  • No a loan is a loan, not a taxable event - technically the LLC will need to pay you a market interest rate, and you will want to document the terms, but in theory since you are electing for S-Corp status that should make the LLC's interest expense simply offset your personal interest income from the loan payment.
    – Grade 'Eh' Bacon
    Sep 17 '20 at 16:52

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