Lending and borrowing from the company

Generally, most companies have operating agreements executed among the partners. Operating agreement is an organizational contract between two or more partners of a company. This agreement sets forth the amount of money, if any, each partner initially invested in the formation of the business. It further includes the repayment terms on funds and policies for future loans to the business.

During the lifetime of the company, the business may need additional financing beyond the initial contributions made by all partners. Sometimes it makes sense to take a loan from the partner rather than deal with the bank or third parties provided a partner is willing and able to extend the funds. Also, if one of the partners needs a temporary loan for any reason, a company may accommodate him faster than any lending institution and earn an interest on the loaned amount.

When a partner lends to the business, there are typically three ways a partner loan may be treated.

1. A loan, where the terms state that the debt amount will be paid back whenever the funds become available to debtor. Under such scenario if a company goes bankrupt or has to liquidate otherwise there may be no funds available to return the loan. 

2. A loan, where the terms state that the debt amount will be paid back within a specific amount of time. Such loan is usually made when a company needs money for a specific purpose.

3. A loan, where the terms state that the debt amount will be paid back with a specific amount of interest over a period of time that the partner deems acceptable. Loans like this are often made to stable companies to finance further growth and expansion.

The general rights, duties and requirements of lending and borrowing from the company as a partner are:

1. When a partner lends money to or transacts other business with a company, he has the same rights and obligations with respect to the company as a third person.

2. When partners have equal obligations to make payments, but cash advance is made by one of the partners and this advance is beyond the amount of capital the partner agreed to contribute, a company has to reimburse that partner. All payments in excess of a partner’s share of contribution are treated as loans to the company.

3. A loan made by a partner will be treated like a third party loan transaction. Usually, the company will reflect it on its records as a credit balance.

There are different ways to structure the lending to and borrowing from the company. Money can be provided by a simple wire transaction, check, cash, or by restructuring the partner’s share in the business (expanding or shrinking it). The main thing to remember is that all transactions between the partner and the company must be conducted like transactions with an independent third party would be. Otherwise, if, for example, IRS finds that some unusual favors were extended, it may qualify the loans as income and tax it accordingly in addition to imposing penalties on the company.

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