Putting personal money into an LLC is really one decision made twice: first you decide whether the transfer is a capital contribution or a member loan, and then you paper it so the choice actually holds up. That label controls how the money is taxed, whether the LLC owes you anything back, and whether a court will respect the separation between you and your business. Skip the paperwork and a judge can treat the LLC as a sham; mislabel the transfer and the IRS can reclassify it in ways that erase deductions or manufacture income you didn’t expect.
Contribution or Loan: Pick One Before You Transfer
You have two options, and they are mutually exclusive. A capital contribution is a permanent equity investment that increases your ownership stake and your capital account. You get it back only through profit distributions or when the LLC dissolves. A member loan is a temporary advance that creates a creditor-debtor relationship: the LLC owes you the principal regardless of whether the business turns a profit, but the loan does not change your ownership percentage or voting rights.
Because you are on both sides of a member loan, the IRS watches these transactions closely for signs of disguised equity. The documentation bar for a loan is higher than for a contribution, and the consequences of getting sloppy are worse.
Documenting a Capital Contribution
Start with the operating agreement. Most operating agreements say how contributions are handled, whether they need member approval, and how they affect ownership percentages. If your contribution shifts anyone’s ownership stake, every member needs to agree to an amendment: draft the change, vote on it, and sign a written resolution reflecting the new terms. If your state required member percentages in your formation documents, you may also need to file an amendment with the secretary of state.
Then draft a Capital Contribution Agreement, or a Member Resolution if you are the only member. It should state the amount contributed, the date of the transfer, and how it affects capital account balances and ownership percentages. Every member signs it. This document is your primary defense in an audit or a veil-piercing lawsuit. Without it, a court can treat the transfer as personal funds passing through the LLC rather than a legitimate investment in it.
After the money hits the account, update the LLC’s internal ledger to reflect the increase in the contributing member’s capital account. That bookkeeping entry ties the bank deposit to the legal document and creates the audit trail accountants and courts look for.
When a Contribution Shifts Ownership
In a multi-member LLC, a contribution that isn’t proportional to existing ownership changes the split. If you own 50% and put in a large additional amount while your co-member does not, your percentage should go up. The operating agreement amendment needs to spell out the new numbers. Failing to adjust ownership when it should change, or changing it without documentation, can raise gift tax questions and partnership allocation problems that a tax professional should look at before you transfer the funds.
Contributing Property Instead of Cash
You can contribute equipment, vehicles, real estate, or other property instead of cash. Under federal tax law, neither you nor the LLC recognizes a gain or loss on a contribution of property in exchange for a partnership interest.1Office of the Law Revision Counsel. 26 USC 721 – Nonrecognition of Gain or Loss on Contribution Your basis in the property carries over to the LLC, and your capital account increases by the property’s fair market value on the date of contribution. The Capital Contribution Agreement should describe the asset, state its fair market value (supported by an appraisal for anything significant), note any liabilities attached, and record your adjusted tax basis. If the LLC assumes debt tied to the property, the debt relief can be treated as a distribution to you, which gets complicated fast. Have your accountant run the numbers first.
Documenting a Member Loan
The IRS scrutinizes member loans more than almost any other related-party transaction. If the loan lacks the hallmarks of real lending, the IRS can reclassify it as a capital contribution (eliminating the repayment obligation) or as a taxable distribution (creating unexpected income). The single most important piece of documentation is a formal promissory note signed by you (as lender) and the LLC (as borrower) at or before the time you transfer the funds.
The note has to mirror what an unrelated lender would demand:
- A fixed principal amount stated in exact dollars.
- A specific maturity date by which the LLC must repay the balance.
- A repayment schedule (monthly or quarterly principal and interest), not a vague promise to repay “when able.”
- An interest rate at or above the Applicable Federal Rate. The IRS publishes AFRs monthly in three tiers: short-term (up to 3 years), mid-term (3 to 9 years), and long-term (over 9 years).
For March 2026, the AFRs with annual compounding are 3.59% short-term, 3.93% mid-term, and 4.72% long-term.2Internal Revenue Service. Rev. Rul. 2026-6 – Applicable Federal Rates for March 2026 Rates change each month, so check the table for the month your loan originates.3Internal Revenue Service. Applicable Federal Rates
Then the LLC has to follow the note. Payments go from the LLC’s account to your personal account on the schedule you wrote down. Skipped payments, waived interest, and repeatedly extended maturity dates all build the IRS’s case that this was never a real loan. Repayment discipline is where most member loans fail. A perfect promissory note in a drawer means nothing if the LLC never makes a payment on it.
Charging Below the AFR
Charging less than the AFR does more than weaken your paperwork. Federal law treats the gap between the interest you actually charged and the interest you should have charged as a phantom transfer: the IRS treats the “forgone interest” as if you gave that amount to the LLC and the LLC paid it back to you as interest. You owe tax on the imputed interest income even though no cash changed hands. There is a narrow de minimis exception: for compensation-related and corporate-shareholder loans, the below-market interest rules generally do not apply if the total outstanding loans between you and the LLC stay at or below $10,000.4Office of the Law Revision Counsel. 26 U.S. Code 7872 – Treatment of Loans With Below-Market Interest Rates For anything above that, use the AFR. Setting the rate correctly costs you nothing and eliminates an entire category of IRS risk.
Reporting the Interest
When the loan is properly documented, the tax picture is clean. Interest the LLC pays you is a deductible business expense for the LLC and taxable income to you, which you report whether or not you receive a Form 1099-INT.5Internal Revenue Service. Topic No. 403 – Interest Received Principal repayments are not taxable because repaying a loan is not income. If the LLC pays you $10 or more in interest during the year, it must file Form 1099-INT, sending you a copy by January 31 and filing with the IRS by February 28 on paper or March 31 electronically.6Internal Revenue Service. About Form 1099-INT, Interest Income Smaller LLCs overlook this filing all the time and get hit with penalties for it.
How Your LLC’s Tax Election Changes the Answer
Everything above assumes your LLC is taxed as a partnership, which is the default for multi-member LLCs. Two other elections rewrite the rules.
Single-Member LLCs
If you’re the only member and haven’t elected corporate tax treatment, the IRS treats your LLC as a disregarded entity.7Internal Revenue Service. Single Member Limited Liability Companies For income tax purposes there is no separation between you and the LLC, which means a “loan” from you to your own single-member LLC has no tax significance. You can’t deduct interest paid to yourself, and you can’t create loan basis in an entity that doesn’t exist for tax purposes. All personal funding is effectively a capital contribution from the tax perspective, whatever your internal documents call it.
The paperwork still matters. It matters for liability protection, for keeping the LLC’s veil intact, and for internal bookkeeping. It just won’t produce the tax benefits you might expect from a genuine lender-borrower relationship.
LLCs Taxed as S-Corporations
If your LLC elected S-corporation status, loan basis works differently than in a partnership. Only direct loans from you to the company increase your debt basis. A bank loan you personally guarantee does not count; the money has to flow from your personal account to the company. S-corp debt basis also carries a restoration rule: if losses reduce your loan basis, future income restores the loan basis first before it starts increasing your stock basis.8Office of the Law Revision Counsel. 26 U.S. Code 1367 – Adjustments to Basis of Stock of Shareholders, Etc.
Moving the Money and Recording It
The physical transfer has to be clean regardless of which route you chose. Move the money directly from your personal bank account to the LLC’s dedicated business account. Never hand cash to someone, route the funds through a third party, or drop them into a shared account. Every transfer should read as a traceable electronic transaction between two clearly identified accounts.
Immediately after the transfer, record the corresponding journal entry. Capital contributions credit the “Member Capital” account. Loans credit “Notes Payable to Member.” That entry links the bank deposit to the underlying legal document, whether that’s the Capital Contribution Agreement or the promissory note. Skip the entry and you end up with unexplained deposits that look like commingled funds to a court or auditor.
Keep the signed agreement or promissory note, the bank transfer confirmation, and the journal entry together as one transaction package. If a veil-piercing claim, an IRS audit, or a fight with a co-member ever comes up, that package is what you show.
How Your Contribution or Loan Affects Loss Deductions
Your tax basis in the LLC is your total investment for tax purposes, and it caps how much of the LLC’s losses you can deduct. If the LLC loses $80,000 in a year but your basis is only $50,000, you deduct $50,000 and carry the remaining $30,000 forward.9Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065) – Section: Limitations on Losses, Deductions, and Credits
Both contributions and loans build basis, but through different mechanisms. Cash contributions increase basis dollar for dollar. In a multi-member LLC taxed as a partnership, member loans increase basis through the liability allocation rules, which generally assign the full amount of a recourse loan to the lending member because that member bears the economic risk of loss.10Office of the Law Revision Counsel. 26 USC 752 – Treatment of Certain Liabilities11eCFR. 26 CFR 1.752-2 – Partners Share of Recourse Liabilities Your Schedule K-1 shows your allocated share of income or loss but doesn’t calculate your basis; that’s on you and your tax preparer.12Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065)
Basis isn’t the only ceiling. You also have to be “at risk” for the amounts you want to deduct. Capital contributions always count as at-risk. Member loans are trickier: the at-risk rules generally exclude amounts borrowed from someone with an interest in the activity, though there is an exception for creditor interests that can preserve at-risk treatment for the lending member. For real estate LLCs, qualified nonrecourse financing secured by the real property can count as at-risk even without personal liability.13Office of the Law Revision Counsel. 26 U.S. Code 465 – Deductions Limited to Amount at Risk
Why the Paperwork Protects You Personally
Veil piercing is the practical reason behind all of this. When a creditor sues your LLC and suspects there is no real separation between you and the business, they ask the court to disregard the LLC and hold you personally liable. Courts look at commingling: personal expenses paid from the business account, business income deposited into a personal account, and transfers between you and the LLC with nothing explaining what the money was for.
Documenting every personal-to-business transfer as either a formal contribution or a formal loan removes the ambiguity that makes veil-piercing claims work. A member with a signed Capital Contribution Agreement, a matching ledger entry, and a bank record is in a different legal position than a member who deposited $30,000 with no paperwork and called it “working capital.” Those documentation habits are the specific evidence a court weighs when it decides whether your LLC keeps its liability protection.