How to loan money to your business the right way

Many people are unaware that you can use a loan as a tax saving strategy. Well, it’s true, and we have run into many folks who are very concerned about the complexity of a loan structure as a tactic.  It is true that loan documents can stand in for boat anchors sometimes and the amount of paperwork you have to keep for taxes or have to file for the IRS can be daunting.  However, WealthAbility has proven that most of the fear and cumbersomeness is due to unfamiliarity and having never gone through the process before.  Hopefully this article can start you off in a new direction…one where you are interested in learning how to save on your taxes by structuring a business loan.

Tips to remember when structuring a business loan between your entity and yourself

The tips below are just a few of the bigger picture items and attention to detail items that will make any loan process less stressful and much more beneficial to your wealth strategy.

Tip #1: Have a Signed Loan Agreement
Have a signed loan agreement that supports how the loan, payments and interest will work. The document should be signed by you and your entity. This means you may have to sign the agreement twice – once for yourself and again for your entity.

Tip #2: Record the Loan in Your Entity’s Minutes
Your entity should approve the loan and the loan terms in its minutes. In doing so, the entity should consider the pros and cons of the loan and document why the loan makes business sense.

Tip #3: Record the Loan on Your Entity’s Balance Sheet
If your entity has a loan agreement that indicates $50,000 was loaned to the owner, that $50,000 should be reflected on the entity’s balance sheet. The loan amount on the balance sheet should be adjusted any time a payment is made that includes principal.

Tip #4: Make Payments Timely
Keep records of all payments made and note the portion that is principal and the portion that is interest. If there comes a point in time when it is not possible to make payments timely, then amend your loan agreement so payments can be made timely.

Tip #5: Charge a Reasonable Interest Rate
All of the above items don’t mean much if the interest rate charged is not reasonable. Whether it’s the owner or the entity making the loan, each party should document their research and findings as to why the interest rate being charged is reasonable.

How do these tips help? They get your loans on track

There is obviously quite a bit more information that can fill in the gaps that we just left when constructing this article.  You may be wondering what types of loans are available…what kinds of loan mechanisms you need to pay attention to…what entity types should think about making these sorts of commitments and what kind of ways you can use the tax savings to build your wealth.

That is what Wealthability is here for.  Our articles, podcasts, and resources are the guides that help you take your entity structure and your personal financing to the next level of wealth. Those who stick with our community and continue to ask questions and learn from our lessons are less likely to miss opportunities for tax savings and more likely to take advantage of opportunities in a more successful and profitable manner. For example, did you even know that you could loan between your entity and yourself?  If not…well, we have a ton more for your to learn. And it’s not that difficult, especially with our simple and guided approaches.

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