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I have a single member LLC (Missouri, United States) that I started a few years ago. We received approximately $20,000 in funding from family and friends, of which I did not fully understand the implications of at the time that it was done. It was never declared as any form of "investment" and did not grant any ownership of the company. It was money that was simply borrowed from people around us.

We are now at the point to be able to start paying back this money to the individuals. My question(s) now is the best way to pay them back.

  1. If we pay back exactly what was paid in, will we need to record these payments as income for the individuals (W9s) to where they have to pay taxes on it?
  2. We also plan on paying recurring percentages of business profits to these individuals after the initial amount is paid back, so what would be the implications and requirements to do that as well?
  3. Would payments to these individuals (either type) be an expense for the business to write off, or would they be taxed for us as well?

Finding the answers to these has been a little difficult since these were all personal friends/family, not banks or venture capitalists.

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    Regarding your 3rd bullet point, interest payments would be taxable to the recipient (and an expense to your business) the principle of the loan is not taxable, you’re just returning their money, the same way it was not taxable to you when you received it; it wasn’t income it was a loan. – quid Apr 19 at 1:00
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    Probably doesn't change the answer, but I'm curious: you mention "single member LLC" but also use the pronouns "we" and "us". How many owners are there? – TTT Apr 19 at 16:50
  • Was the money loaned to you personally, and you used the money to start the business, or was the money loaned to the business? If it was the business, does the business accounting show liabilities for the loans, or does it just appear as if you personally seeded the business with $20K? – TTT Apr 19 at 17:01
  • Are the payments from revenue EXPECTED by the people who loaned to you, or are you simply being a good friend and paying them because you feel it's the right thing to do? What EXACTLY were the terms the money was loaned to you under - "just give it back when you can", "You're gonna cut me in on profits, right?" - what did those conversations look like, because your post muddies the waters quite a bit on this and makes it hard to give you a clear answer, as the threads below show! (grin) – RiverNet Apr 20 at 21:14
  • Generally speaking, repayment of a loan is not deductible to the payor and not income to the payee. Interest on the loan is a deductible expense and is income. – Pete Becker Apr 21 at 12:13
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If it did not grant any ownership in the company, then it was a loan. A loan with "recurring percentages of business profits" sounds like a type of revenue share loan — let's call it a profit share loan.

If the terms haven't been discussed yet, then choose the terms that make sense for all parties.

For a revenue/profit share loan, the 'share' payments are considered to be loan interest. Interest income for the recipient means that your business can issue a 1099. Your business can also deduct the loan interest as a business expense.

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  • Why is the topic of gift tax relevant when repaying loans? – Lawrence Apr 19 at 8:19
  • @YoshiOnimusha - hmm, the situation seems perfectly clear. They made a loan to purchases a revenue stream. Nothing more to it. – Fattie Apr 19 at 13:00
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    There are a couple points of confusion here. (1) there is no gift involved at all (2) "interest" is mentioned a couple times, such as in the final sentence; there is no interest involved at all. It's just an ordinary, simple, everyday, commonplace loan-for-revenue. – Fattie Apr 19 at 13:01
  • Thanks, rereading the original post, it's likely that this is a "profit share loan." Changed my answer accordingly. – Orange Coast- reinstate Monica Apr 19 at 20:53
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    Hi @OrangeCoast-reinstateMonica - I was wondering: For a revenue/profit share loan, the 'share' payments are considered to be loan interest - in my experience (both sides) that has not been the case. Can you tell where you got that from or why it came to mind? It's simply not interest and has no connection to interest. Note that: * We plan on paying recurring percentages of business profits...* to the people. This just has no connection to interest. Continued ... – Fattie Apr 20 at 18:32
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1 - It seems that they gave you a loan, interest free, in exchange for some benefit (in fact, a specified revenue stream). (There is no "gift" involved whatsoever. It's a completely normal business deal, as if you sold them a packet of gum.) So far there is nothing to do, say or report.

2 - Yes of course, obviously. If business B pays person P ten bucks in that situation, that is a ten buck cost, expense, for the business; and it is ten bucks income for the person. Obviously.

3 - Ditto, see (2).

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    Your point #2 is a little misleading. If businesses B pays person P ten bucks,it could also be profit distribution or a dividend,both of which would be taxed differently than how you seem to imply. – TooTea Apr 19 at 21:30
  • hi @TooTea ! However, as it says clearly "it is ten bucks income for the person". Which is a fact. Of course, different people will pay tax on that ten dollars (or an any ten dollars) in drastically different ways. On the other side, I (myself) don't see any way you could get away with calling this a dividend? It's just a payment for a service - exactly like, say, a royalty per unit sold, or just any plain payment for a service given. i think!! – Fattie Apr 19 at 22:26
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    @TooTea the investors are not owners so they can't receive distributions (or dividends). From the question, it's not exactly clear (yet) how the investors will be paid. – TTT Apr 20 at 17:03
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    It makes a difference for how it's reported and whether or not it's taxable. For example, distributions payments are not deductible by the business or taxed as income by the recipients. Interest payments and contractor payments would be deductible, and declared as income by recipients, but the reporting forms and thresholds are different (1099-INT, 1099-MISC, 1099-NEC, etc.) I'd say the discussion around your point #2 is probably not needed since the investors can't get distributions or dividends, so I can't think of any way (as a Single Member LLC) that your point #2 could be wrong. – TTT Apr 20 at 19:48
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    I don't wanna annoy the Hardworking Mods with discussion, and (B) the bloody question is so confused anyway! :) I may ask some of these questions more clearly as another question, leading to more discussion! Cheers !!! :) – Fattie Apr 20 at 20:01

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