How to borrow money from friends/family

Question

I have a handful of friends and family members that are interested in lending smaller amounts ( <$5,000) for house flips and BRRRR deals. This cash could help with interest-only payments and down payments. I formed an LLC to flip out of and am curious how I can borrow this money so that I can show this as an expense or loan so that I don't have to pay taxes on it when I pull it out of the LLC. I am in Pennsylvania, and the usury laws cap interest on amounts less than $50,000 at 6%.

Do I need to have a promissory note or otherwise included with my receipts come tax time? I would rather not create a new LLC with 3+ people or have to put these folks on the deed for such small amounts, but I would like it to be legitimate. I am curious about how one should handle money borrowed from friends and family when they have a business.

Ujwal Velagapudi · Answer

I would check with an attorney on that, but I would think that should be fine. It's just for worst case if things get there, so write your documents accordingly. But in reality I think you can be OK with just waiving it, pay 10%, and write that interest off. Would still double check with a local attorney. I'm sure you can get it answered with a few free consultation calls without spending a dime :)

Jimmy Suszynski · Answer

Ok, so I was on the right track with a promissory note. Now, I would just need to waive the maximum interest rate of 6%? I want to be paying more than 6% to make it worthwhile for them. Six percent on $2,500 isn't very much, I would offer 10% annual, paid back when I sell/refinance.

Ujwal Velagapudi · Answer

The only expense, to my knowledge, you would be showing is the interest - not any principal or other payments. You 100% should do promissory notes, or some contract, even with close friends and family. To keep things simple you just accept the money from 3 different people, have 3 different promissory notes with each of them. Within the note, you personally are not guaranteeing (I'm assuming, since it is just close friends/family), but the business is. So the LLC you already created is the one borrowing the funds, and promising to repay, along with an interest rate. That interest is what will come into play in taxes. You don't need a new LLC for each loan. I would check on the tax aspect with a professional, but your situation seems to be pretty simple & straightforward.