Template Tuesday: Documenting “Friendly” Loans to and from Your LLC

Good Morning!

1. Feature: Template Tuesday: Documenting “Friendly” Loans to and from Your LLC (4 min)

2. From the Archive: Transferring Highly Appreciated Assets Like Bitcoin and Art to a Sole-Member LLC. Read it here

We hope your week is off to a great start!

-TCoL

Missed our last feature article? Need an Attorney for your Business? A Guide to Selecting Carefully. Read it here.

Every small business ends up with money flowing in ways that are not always neat.

A member pays company expenses with a personal credit card. The company covers something personal and books it as a receivable. At first, the amounts were small. Over time, the balance grows. By year end, your CPA wants to know why the receivable is still there. The IRS will ask the same question when it reviews your tax return looking for unreported personal income.

When balances build and linger, the right answer is to pay up or document them as loans. This does not mean you are pledging collateral or asking other members for personal guarantees. It is not the same as borrowing from a bank. It is a friendly arrangement within the company. Still, a promissory note makes it clear that the obligation to repay is real.

This week’s template is a simple installment payment promissory note. It is built for loans between a member and the LLC. It gives your CPA the paperwork needed to book the transaction properly and it gives the IRS the evidence it wants to see if the debt is ever questioned.

Maker and Payee

A promissory note always has two sides. The maker is the one who promises to repay. The payee is the one entitled to repayment.

If you loan money to your company, the company is the maker and you are the payee. If the company loans money to you, you are the maker and the company is the payee. The template spells out these roles and provides signature blocks so that there is no doubt about who owes what.

The elements of this note

The template follows a traditional structure. It covers the basics that transform an open receivable into a loan.

Principal and interest. The note states the amount borrowed in words and figures and sets a fixed interest rate. The opening phrase “For value received” signals a binding obligation.

Pro tip: Discuss an appropriate interest rate with your CPA. They can explain imputed interest rates and what would be considered reasonable (by the IRS) in your circumstances.

Repayment schedule. The balance is paid in equal monthly installments of principal and interest for a set number of months. This is the strongest evidence that a loan is being retired. 

Prepayment. The maker can pay early without penalty. That flexibility matters when cash flow is unpredictable. 

Default and remedies. If a payment is missed and not cured within thirty days, the entire balance can be accelerated and interest continues until paid. 

Costs of collection. If collection is required, the maker pays reasonable attorney’s fees and costs. This shows the parties expected the debt to be enforceable. 

Waivers. The parties waive formalities such as presentment and protest. This prevents small technicalities from blocking enforcement. 

Signatures. The maker signs. If the company is the maker, a manager or officer signs on behalf of the LLC.

Why installments matter

“Interest only” promissory notes are considered a simple alternative to installment notes, but they do not prove that the principal will be reduced. The IRS views interest-only notes with suspicion. An installment note, by contrast, creates a schedule that shows regular principal repayments. Each installment demonstrates intent to repay and distinguishes the loan from a disguised capital contribution or distribution.

When to use this template

You should consider this template whenever a balance builds up between a member and the company. That includes a member advancing cash to the LLC without quick repayment or a member owing the LLC for personal charges. It also includes a sole member who effectively sits on both sides of the transaction. Even then, the IRS expects to see documentation.

This note is not meant for outside borrowing. A bank or third-party lender will require collateral, guarantees, or more detailed terms. This template is for internal use between members and the company only.

Email [email protected] to get started.

Keeping it friendly but real

This is a friendly arrangement between the company and its members. What makes it credible is the paper trail of having a promissory note and payments to back up your books and records. A signed promissory note with a repayment plan helps show your CPA and prove to the IRS that the balance is legitimate debt.

Use it to turn informal balances into formal loans. It will keep your records clean and your tax position secure.

Premium subscribers to The Co. Letter will get an email today containing the new Promissory Note Template. Not a Premium subscriber yet? Upgrade now for $7.95/mo. or $85.86/yr. and get the new Promissory Note Template as well as 15+ other, professionally prepared templates in our ever-expanding Template Library.

Have an interesting business question and need a free bit of advice? Send your question to [email protected]. No confidential info, please!