A loan between you and your small business (shareholder / member of corporation & LLC) is subject to special scrutiny.
If your loan is not documented correctly, the IRS will treat it in ways that may result in unfavorable tax consequences. The loan must meet certain minimum standards that include:
- A written unconditional promise to pay (promissory note).
- The loan must be due on demand or on a stated due date.
- A reasonable rate of interest must be stated or be determinable by reference to a published rate.
- The borrower must be creditworthy.
- Payments, including principal and interest, must be reasonable. At least the interest must be paid on an annual basis.
If the above provisions are not in place, now is a good time to have your legal representative prepare the appropriate documentation.