Can I Loan Money To My Own Business? [Business Legality 101]

Frustrated and disappointed, you wonder if you will ever know if you can loan money to your own business or not. 

Well, wonder no more! Today, we are here with the answers you need. Keep reading to find out if you can loan money to your own business and the legalities surrounding it! Get ready to become a business legality expert today! 

Can I Loan Money To My Own Business?

Let’s dive straight into it! Yes, you can loan money into your own business, but there are some implications you need to be aware of.

Nothing is stopping you from putting your own money, or money you have personally loaned into your business, but you need to follow the correct procedures. 

Not only will this protect you from any extra tax, but it ensures that you know who is liable for the money if it was a loan that needs to be repaid.

The good news is that the money you have in your account should be easy enough to move across, although we do recommend that you seek legal and financial advice if you have never done it before, to protect yourself and your business. 

Now that we have established that you can loan money to your own business, let’s take a look at how you can do that, and what the legal ramifications can be! (see also 'How To Fund Your Business With No Money [8 Best Methods]')

How Do I Loan Money To My Business?

Loaning money to your business can be done in four steps. Let us walk you through these steps now. 

Step 1 - Set Up A Business Checking Account 

If you don’t, already, set up a business checking account. Not only does it add protection to your personal assets, but it offers a legal entity for your business that gives you even more protection!

There are lots of business checking accounts you can choose from, make sure you do your research beforehand to find the right one for you and your business. 

Step 2 - Where Is Your Money Coming From?

Next, you need to determine where the money is coming from. You have lots of choices here, but each option comes with its own risks, so make sure you think carefully.

We think it's best to make a list including your assets, income, investors, liabilities, and credit score to help you work out what is the best option for your business. 

Often, people use one of the following sources of personal money to act as a loan for their business: 

• Personal loans 
• Money from friends and family
• Credit cards
• Home equity loans
• Personal savings

However, if the money is a loan, you must establish a repayment plan. Will the money be paid back with any interest? How long do you have to make the repayments?

You will want this written down and legally binding, to ensure that you get your personal money back. If you co-own the business, you will both need to agree on a repayment plan for the money. 

Step 4 - Record The Money 

To finish, make sure the loan you have given is documented. You will want it visible on your business accounts, and you will want a document stating that your personal money has been loaned to the business. If you are unsure how to do this, enlist the help of an accountant and solicitor. 

They can help to check your books are being kept correctly, and that the money is being deposited legally. 

What To Consider When Loaning Money To Your Business? 

There are a few things you need to consider when you loan money to your own business. Let’s take a quick look at these now to help you decide if it is the right move for you. 

The Risk Of Losing Your Money 

It’s no secret that it is a tough world out there for a small business. A lot of small businesses don’t survive more than a few years.

If your business was to go under before your loan was repaid, how would you get the money back? It’s worth considering this and putting a clause into your loan agreement - this could take security over certain assets for example.

You might agree to lose a certain amount of your personal loan to pay any other debts or to pay shareholders.

Alternatively, you might ensure that your money is returned before anyone else's. It's not a pleasant thought, but you need to know what will happen to your money should the worst happen. 

Is The Legal Structure Right?

Consider the structure of your business too. Businesses that are LLCs or corporations offer the owner protection from personal liability. This offers your personal money and assets more protection should anything go wrong. 

Moving personal money into a corporation can be trickier, so you might be better off with an LLC. If you aren’t sure what the correct structure for your business is, be sure to seek some legal advice.

Having your business registered correctly can make it easier for you to move money around and comes with more protection for you and other investors. 

Tax Implications 

Finally, you need to consider the tax implications of putting personal money into your business. Money loaned to your business or invested as equity is not allowed as a deduction on your personal taxes. 

But as a business, there are some tax advantages. Mainly, when paying interest on a loan or if you sell ownership interest in the business (see also 'How Much Can I Sell My Business For?'). The tax implications will vary depending on how the finance has been structured.

You should have a reduced taxable income if it is a loan and interest is being paid.  While this is great for your business, that interest the business pays is going to be income to person who lent the funds.  So you may personally end up paying tax on it.  So best to discuss with your accountant.

Final Thoughts 

And there you have it! You can loan money to your own business, but you need to carefully consider all the factors before you do. This involves any tax implications, the structure of your business, and how you would get your money back if your business went under.

Make sure you consider these factors carefully and seek legal advice before you pour your money into your business.