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I have an American LLC with money in the bank. I want to provide a loan to my friend for 3 years for 5%. Is this something I can legally offer if the activity of my LLC has nothing to do with finance? Or is lending money limited to a corporation with a specific license?

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    What tax election status does your LLC have? Can't you just loan the money personally? – TTT Jun 9 '16 at 14:39
  • @TTT It's a single member LLC. – brt Jun 9 '16 at 16:41
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    Can LLCs have friends? – quid Jun 10 '16 at 0:27
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    Keep in mind that lending money to a friend is never recommended, if you value your friendship. There are just too many things that can go wrong. The fact that it would be through your LLC doesn't change that at all. – Ben Miller Jun 10 '16 at 13:18
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One thing I would add to TTT's answer: One of the benefits of using an LLC for your business is right there in the name - "limited liability". It provides a level of protection for your personal assets should your business go bankrupt, get sued, and so forth.

However, if someone can show that there's no real separation between your LLC's activities and your personal activities, then they can "pierce the corporate veil" and go after your personal assets. If this loan is really purely personal and not related to your business activities, you may create a paper trail that can later be used in this way.

My advice would be to just avoid the whole thing and make the loan from personal funds. I don't see any upside to doing this out of the LLC funds.

6

Legally, I can't find any reason that the LLC could not lend money to an individual. However, I believe the simplest course of action is to first distribute money from your company to your personal account, and then make it a personal loan.

Whether the loan is done through the business or personally, financially I don't think there is much difference as to which bucket the interest income goes into, since your business and personal income will all get lumped together anyway with a single person LLC. Even if your friend defaults on the loan, either the business or you personally will have the same burden of proof to meet that the loan was not a gift to begin with, and if that burden is met, the deduction can be taken from either side. If a debt goes bad the debtor may be required to report the debt as income.

3

I can't say if there is anything specific that makes lending illegal, but if your company goes bankrupt, you might end up in trouble.

First, it's a loan. It must be repaid. It must be in the books as a loan, and if your company couldn't pay its bills, you would have to ask for the money back. If the company goes bankrupt, your creditors will ask for the loan to be repaid.

Now if things are worse, your company goes bankrupt, and the person cannot pay back the money, then you could get into real trouble. Creditors won't like that situation at all. They will claim that you moved that money aside to protect it from creditors. They might be able to force you personally to pay, or even start criminal charges against you if you can't pay either.

In the UK (and probably elsewhere) it's criminal for the company to pay dividends if that means it cannot fulfil its financial obligations. If there is no money left because of that loan, then you can't get dividend payments from your company.

So as long as your company's finances are fine, and that person's finances are fine, you will be Ok (except I don't know if you would need a license), but if there are financial problems then being an LLC might not protect you.

1

The answer to your question is...it depends. Depending on the state you, your friend, and the LLC are located in, it can be very easy to run afoul of state banking laws, or to somehow violate some other statute pertaining to the legal activities an LLC may undertake by doing something like a loan. It is not unusual (or illegal) for officers or employees of a business entity to be loaned money by the company they work for, so something of this nature wouldn't be an issue with regulatory agencies. Having your LLC loan money to a friend who isn't an employee or officer of your LLC just might not be kosher though. The best advice I can give is that you should call the state banking commission or similar agency in your state and ask them whether what you want to do is alright. The LAST thing you want is to end up with auditors or regulators sniffing around your business, even if you haven't done anything wrong, and you certainly don't want to run the risk of accidentally "piercing the corporate veil", as someone else here astutely pointed out. Good luck!

-5

Tax accountant here.

The money is yours and you can do what ever you want with it. Just make sure to put it on the books as Loan Receivable and have an Interest Income account.

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    You, my man, are not a tax accountant. The money is most definitely not yours. It's the company's money. – gnasher729 Jun 10 '16 at 10:14
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    @gnasher729 - He said he was a tax accountant. He did not say he was a good one. – JoeTaxpayer Jun 10 '16 at 10:41
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    @silver-saguaro: Your answer is totally misleading. You own the company. You don't own the company's money. They are separate. If you empty your company's bank account to buy a new Ferrari, and then the company can't pay its bills, you are so in trouble. Now please, please, for heavens sake, tell us that you made it up when you said you're a tax accountant. – gnasher729 Jun 11 '16 at 21:21
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    @silver-saguaro: Ever seen IANAL on a post? Which means I am not a lawyer? Because if you give incorrect legal advice as a lawyer, on a site like this, you're in trouble. IANAL, but I believe that if you claim to be a tax accountant, and give incorrect advice about taxes here, you can get into trouble as well. – gnasher729 Jun 11 '16 at 21:25
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    @silver-saguaro If you believe this answer, please read the other answers which outline the very real risks of completing this transaction. And as to your last comment, "this question is so basic that I didnt even have to think about it" - that is a very unprofessional thing to say, in that it belies an overconfidence in your own knowledge. You should know better that tax is far too complex to give concrete answers like this offhand. Even if it is something you practice in daily, you should know that caveats are required here (like credit issues if your bank doesn't like the loan, etc.). – Grade 'Eh' Bacon Jul 4 '16 at 14:20

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