Financing Issues for an Limited Liability Company
LLCs have an easier time finding financing than partnerships and sole proprietorships because they offer a formal structure for investors and lenders. Moreover, a LLC offers flexibility to distribute gains disproportionately to investment in the business. (As stated previously, this must pass IRS special allocation tests.)
There are a number of financing issues involving LLCs, including:
- The ability to allocate gains and losses disproportionately to investment in the LLC. A company must meet a special allocations test. The IRS checks that the special allocation is based on real economic circumstances of the business and not to reduce an owner’s income taxes. Consult with your accountant for more information.
- Owners are not personally liable for debts or lawsuits (limited liability protection). However, the owners would be liable if they personally guarantee a loan or do not comply with the corporation’s management requirements.
- Business owners need shareholder approval for major investments or business decisions.
- Loans for a small business are affected by the owners’ or directors’ credit score.
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