How do they compare?
| Capital contribution | Loan | |
|---|---|---|
| Recorded as | Owner's equity | A liability of the LLC |
| Getting it back | Through distributions | Through scheduled repayments |
| Interest | None | Taxable to the lender, deductible to the LLC |
| If the LLC fails | Paid last, after creditors | Ranks with other creditors, if properly documented |
| Basis | Increases basis | Can increase basis for partners and, as debt basis, for S corporation shareholders |
Whichever you choose, make the payment from your personal account to the LLC's account, never by paying business bills personally without recording them.
If you have co-owners, agree in writing whether each member's money is a contribution or a loan, because it changes how profits and repayments are shared.
What about a single-member LLC?
Because a single-member LLC is disregarded, a loan from the owner is a loan to yourself for income tax: no interest income, no interest deduction. It still matters legally, since a documented loan ranks with other creditors, and for a foreign-owned LLC, both loans and contributions are reportable transactions on Form 5472. See Form 5472.
What about partnerships and S corporations?
In a multi-member LLC, a member's loan is a real debt of the partnership: interest is income to the member and deductible to the LLC. In an S corporation, a shareholder's direct loan gives debt basis, which can allow losses to be deducted. See deducting business losses.
How do you document a loan properly?
Write a promissory note
Amount, interest rate, repayment schedule and what happens on default.
Charge reasonable interest
At least the IRS applicable federal rate for the term, to avoid imputed interest rules on below-market loans.
Transfer the money
From your account to the LLC's account, with a clear reference.
Record it as a liability
In the LLC's books, separate from equity.
Repay on schedule
A loan that is never repaid may be treated as a contribution.
What does an example look like?
A founder in Pakistan puts $20,000 into her single-member Wyoming LLC to buy inventory. If it is a contribution, her equity rises by $20,000 and she takes the money back later as distributions. If it is a loan, the LLC records a $20,000 liability, signs a note to repay her over two years with interest, and each repayment reduces the liability. Either way, she reports the transfer on the LLC's Form 5472 for that year, and for US income tax nothing changes, because the LLC is disregarded.
Can a loan become a contribution later?
Yes. An owner can forgive or convert a loan into capital, which should be documented in writing and recorded in the books. For a single-member LLC this has no income tax effect. For a multi-member LLC, it changes capital accounts and should follow the operating agreement, ideally with the other members' consent.
Which should you choose?
A contribution is simpler and suits start-up funding you do not expect back soon. A loan suits money you want back on a schedule, or if you want to rank ahead of equity in a failure. Either way, record it correctly from day one. See bookkeeping for a single-member LLC.
Putting money into your LLC?
We record contributions and loans correctly, prepare simple loan documentation, and report them on the right forms.
Questions people ask
Should I lend money to my LLC or contribute it?
Contribute if you do not expect it back on a schedule. Lend it, with a documented note and interest, if you want scheduled repayments.
Is a capital contribution to my LLC taxable?
No. It increases your capital account and basis.
Do I pay tax on repayments of a loan to my LLC?
Not on principal. Interest is taxable income to you, except where the LLC is disregarded.
Does a foreign owner report loans to the LLC?
Yes. Loans and contributions between a foreign owner and the LLC are reportable on Form 5472.
Sources
Every fee, date and rule on this page was taken from these official and primary sources.
- IRS: Applicable federal rates
- IRS: Instructions for Form 5472 (Rev. December 2024)
- Internal Revenue Code section 7872: below-market loans
Rules and fees change. If you are reading this long after October 1, 2026, confirm the figures with the source before you rely on them.
Related guides
More in Business tax by entity type
This guide is general information. It is not tax or legal advice for your situation.