There are several strategic, financial, and tax-related reasons you may make a personal loan to your C Corporation.
If you own a C Corporation, there may come a time when your business needs extra cash — to buy equipment, cover payroll, or safeguard a slow season. While an owner may think about putting money into the company as an equity investment, there’s another option: loaning money to your corporation.
Why loan money instead of investing?
Here are a few key reasons:
- You keep your ownership structure the same.
When you loan money rather than buying more shares, your percentage of ownership doesn’t change. This may be most helpful if you co-own the business and don’t want to reduce anyone else’s stake.
- You can earn interest.
As a lender, you’re entitled to receive interest payments on your loan. This will give you a return on your money, regardless if the business isn’t profitable enough to produce dividends.
- Your corporation may get a tax break.
interest paid on a business loan is usually tax-deductible for the corporation. That can reduce your company’s taxable income as well as save money at the next tax season.
- You have more protection.
If the business were to close down, creditors (including yourself as a lender) are paid back before any shareholders. The benefit of structuring your support as a loan rather than equity may give you a better chance at recovering some of your money invested.
Don’t forget the paperwork
To make this legitimate in the eyes of the IRS, your loan needs to be structured and acted out like a real loan.
- Write a promissory note
- Charge a reasonable interest rate
- Create a repayment plan
- Record payments properly in your books
Loaning money to your C Corporation can be a smart, flexible way to support your business — just make sure it’s organized correctly.
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