I have an LLC in CA with my brother acting as the primary member of the company. In an effort to get the company started and to get us through some growing pains I loaned the company money, around 50k.

The idea was my brother was going to start taking a salary first when we were able to accommodate and then at some point later when we could afford to pay me as well we would. I already had some income to live off of so I wanted to help the company and my brother.

Here is my question, We are now able to afford to start paying me a salary. Or do we pay back my loan? My brother wants to repay the loan rather ten offer the salary. My position is if I take the salary now and wait until the company is flush with resourses I could get the loan paid at a later date. If I opt to just stat taking the loan repayments then I would be out of getting the salary that we can now afford and the loan at a later date.

It seems my brother wants to use the loan repayment as my salary which means I would really not be getting a salary and just getting my loan repaid.then when the loan is repaid he would put me on salary. Is this fair, how do I explain it to my brother/partner?

Thank you so much for any help

The Loaner

  • When do you want to pay taxes? Salary is taxable income to you, whether you get it now or later. Loan repayments are not, regardless of whether they are received now or later. By the way, what about interest on the loan? – Dilip Sarwate Apr 18 '15 at 1:49
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    What does the promissory note say? Did you even bother drafting one? – littleadv Apr 18 '15 at 4:11

Let's look at the two options.

It sounds like, at this time, the company has enough cash to pay you a salary or pay your loan off, but not both at the same time. Ideally, in the future, there will be enough cash flow to be able to do both at the same time.

If you start your salary now, when the cash flow increases to the point where the company can pay off your loan, you will continue to receive your salary while the loan is being repaid. So it is probably most advantageous to you to start the salary now and wait with the loan payments. (If you think that the company is not going to make it and there is a danger of not ever getting the loan repaid, this could change; however, you are probably optimistic about the company, or you wouldn't have made the loan and agreed to work for free in the first place.)

With the other option, the company gets out of debt quicker and cheaper. I can totally understand your brother wanting to eliminate this debt ASAP.

It looks like you and your brother had different expectations about what was going to happen. That's why it is so critical to put these kinds of agreements in writing. If you had had a payment schedule in your written loan agreement, this wouldn't be an issue. Of course, the issue of how long you would continue to work for free would still be there, but this could also have been decided ahead of time. As is, you have two different things going on that were left up in the air with no formal agreement.

As to what is fair, that is something only you and he can work out. Perhaps you can propose a payment schedule for your loan that the company can afford now while paying your salary; that way, you will start getting paid for working, and the company will start moving toward eliminating the debt.

I hope that you will be able to agree to a solution without ruining the relationship you have with your brother. Besides the fact that family relationships are important, a rift between the two of you would certainly be disastrous for the company and, as a result, your and his finances.

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  • You hit the high points. "That's why it is so critical to put these kinds of agreements in writing" would be a second +1 if I had the powers. – JTP - Apologise to Monica Apr 18 '15 at 14:24

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