1

This question is in context of USA.

Background: My brother and I plan to invest money in an LLC that will invest in a startup. I will take a temporary loan at 0% interest from my brother to invest in the LLC as individual partners. My brother and I live in different states.

Questions:

  1. Do I need to do a loan agreement with my brother for tax purposes? Because he will transfer a significant amount to my account, will I need some document to show to IRS as its reason? If yes, then what? Or is it enough if he mentions some things in the transfer memo?
  2. Is it legally feasible that my brother directly transfers the money to the LLC for investments in my name?

Please feel free to ask for clarifications.

1

Do I need to do a loan agreement with my brother.

Yes. It will set out the repayment process. It will specify when the payments will start, how much they will be, and other important details. The more explicit the agreement the more details the lawyers will have to work with if the partnership goes south.

Do I need to do a loan agreement with my brother for tax purposes? Because he will transfer a significant amount to my account, will I need some document to show to IRS as its reason?

It will be proof that it wasn't a gift. That will mean that the IRS won't be looking for a gift tax form, if there is an audit.

Or is it enough if he mentions some things in the transfer memo?

I don't think the transfer memo will satisfy the lawyers.

Is it legally feasible that my brother directly transfers the money to the LLC for investments in my name?

While it is possible to do a direct transfer, I would do it in two steps. It keeps the loan and the loan details out of the corporate documents.

1

Do I need to do a loan agreement with my brother for tax purposes? Because he will transfer a significant amount to my account, will I need some document to show to IRS as its reason? If yes, then what? Or is it enough if he mentions some things in the transfer memo?

Both of you will need a proper note. It probably shouldn't be a 0% note since your brother will have to pay income taxes as if you paid interest (see the Intuit article on "imputed interest"). Your brother will show the note if asked why he hasn't file form 709 (Gift Tax Return) for this money, and you will show it if asked why you hadn't reported this income. This note should specifically say that the money has to be repaid under specific realistic conditions (otherwise it's not really a loan but rather a gift). You would probably want an attorney or at least a licensed tax adviser (EA/CPA) to advise you here.

Is it legally feasible that my brother directly transfers the money to the LLC for investments in my name?

Yes, but it doesn't matter with regards to how the transaction between your brother and you is structured. To make the tracing easier, I'd suggest to transfer to your personal account and then make a transfer from your personal account into LLC. This will also help avoid complications later if arguments arise with regards to who contributed what.

One benefit of directly transferring the loan proceeds into the LLC is if you want to deduct the interest as "investment interest expense". There are some conditions and limitations, and TCJA affected that deduction as well, but it may still be useful at some point. You can do it with two steps as well, but be careful with tracing. Check with your tax adviser.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.