Can one of my LLCs loan my other LLC money?

Question

I currently have an LLC for my consulting business  (not real estate) and want to loan my real estate LLc money for purchase and renovations.  Is this allowed? Or do I need to make a disbursement to myself to fund the real estate LLC?  What should I be considering? Thank you for your insights.

Jenifer Levini · Answer

@Michael McDevitt I'm a little bit surprised at your answer. I'm an attorney and one of the things that is most important to maintain the integrity of separate entities is to keep finances from co-mingling. this prevents potential litigants from piercing the corporate veil. In your answer when one LLC contributes to the other without any contract, such as a note, this would appear as sharing funds which would definitely contribute to the argument that they are not separate entities.

There could be other ways besides a loan. One entity could be a member of the other. Embedding is a pretty sophisticated way to manage finances that allows this sort of contributions, depending on the operating agreement.

However, I'd imagine that a loan could have other tax benefits.

There could be other ways besides a loan. One entity could be a member of the other. Embedding is a pretty sophisticated way to manage finances that allows this sort of contributions, depending on the operating agreement.

However, I'd imagine that a loan could have other tax benefits.

Kory Reynolds · Answer

Following the question as originally asked, I'll assume both entities have identical ownership. For the loaning company there is no deduction for the amount loaned - it is just an asset recorded on the books. Same with the borrowing company - a liability is recorded on the books. Assuming a note is drawn up, the lending entity will earn interest income as principal and interest payments are made, and the borrowing company will recognize an interest expense deduction. In this scenario with identical ownership we follow the 'self charged' interest rules, and get to reclassify the interest income from portfolio income to passive income - so the character matches that of the deduction. This in the end, no net income impact to the owners assuming no at risk/basis limitation issues exist.

Chris Coleman · Answer

@Jenifer Levini

Can you please elaborate on your last statement, "And, its definitely an interesting idea to set up real estate holding companies as layered entities. I set up mine that way to give investors different streams of income from the appreciation and the rental income, and to protect each asset from the other's liabilities."?

I understand setting up layered companies between those that are performing service work and those that are holding assets, etc...as well as forming contracts between various LLC's for services, etc.  But what do you mean by giving investors different streams of income from the appreciation and the rental income, and to protect each asset from the other's liabilities?

Thanks

Account Closed · Answer

Account Closed

Terms aside, what is illegal about my suggestion?

Matthew Kreitzer · Answer

I would throw in my two cents as a different type of lawyer than Ms. Levini, who is giving fantastic educational information. As a debt collection attorney who spends a significant portion of his time trying to ignore the hard work of other attorneys, I see a few different problems from the perspective of your vendors and maybe even the bankruptcy courts if your business turns upside down. Primarily; a court may see the transference of money as an attempt to circumvent the secured claims of your vendors that most likely exist, and such transfers could potentially be declared void.

I'm sure there are other types of attorneys out there who have similar aversions to this kind of transaction policy, so I would recommend seeking legal counsel first, someone licensed in your own state.

DISCLAIMER: Above for educational purposes alone. Not intended to create attorney client relationship. Seek local counsel if you have legal questions. Each case unique.

Jenifer Levini · Answer

Account Closed, Yes, youre right on. The system of layering entities and giving them ownership of different assets is a great way to protect assets in industries where there is likely to be lawsuits or other "disturbances." That is the way lawyers set up businesses in the marijuana industries, in banking industries, in investment industries, in utilities...

And just as I was explaining above, when money transactions happen between two of those entities, there is a paper trail (contracts, loan notes...) and NEVER any gifts (AKA contributions) that could appear as co-mingling funds.

And, its definitely an interesting idea to set up real estate holding companies as layered entities. I set up mine that way to give investors different streams of income from the appreciation and the rental income, and to protect each asset from the other's liabilities.

Jenifer Levini · Answer

@Chris Coleman layered entities is when you have one entity owning another. For example you can have the members of an LLC be other LLCs or C-Corps. And then the members of that LLC can be other LLCs and/or C-corps or other entities...

In one of the models I use there is one entity that owns the land, and another that manages the HOA, and a third that owns personal assets of the property (like swimming pool equipment). The HOA has a different stream of income (rent & fees), than the ownership of the land (which creates appreciation and realized gain upon sell of a membership). There are many different ways to break up ownership and create different streams of income, isolate liabilities, and embed entities.

That's why a good lawyer is worth her weight in gold. This is a way of doing business that some of the bigger investors and big companies operate. Its not necessary for average investors who own maybe a dozen pieces of real estate and assets under $1M

In California where lots of real estate is over $1M, people also use Trusts, and layered Trusts to make it difficult to find the real owner of a flipped house. An investor recently explained his whole convoluted trust layering schema to me. It seemed completely unnecessary if you know how an LLC shields you from liability.

Ron Dulay · Answer

There was a question as to why you would want to loan from one LLC to another  Well if one LLC holds a real estate rental property free and clear, in case of litigation it could be a very juicy target.   If that LLC has a significant mortgage against it, thereby reducing its net worth, it becomes less of a target.

Malcolm Jackson · Answer

This is a great question. What are the tax implications for both businesses when one loans to another? Does the business writing the loan discount their income for the year for the amount of the loan and thus taxes are lower? and whats the situation for the company receiving the loan?   Or is the loaning company taxed on the loan amount anyhow, just like a disbursement?I just don't understand how this works taxwise if one wants to take funds from one company to invest in another.

Account Closed · Answer

@Jenifer Levini

My bad Jenifer.  So unlike me, you actually read my post in its entirety.  That's why your the lawyer. :)

Can one of my LLCs loan my other LLC money?

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