Is the money you put into your business a contribution or a loan?
Updated: 6 days ago
It's whichever your documents say, and if they say nothing, it's whatever someone decides later.
Owners fund their businesses constantly and almost never document how. That works until it matters.
Capital contribution
You put money in and your ownership interest reflects it. It adds to your basis. It doesn't get repaid on a schedule; you get it back through distributions or when the business sells.
Loan
The company owes you. It can be repaid ahead of distributions to owners. Repayment of principal generally isn't income to you. Interest generally is.
Why the distinction matters
On a sale. A documented loan gets repaid off the top. An undocumented contribution shares in whatever's left.
With partners. If you put in $50,000 and your partner didn't, whether that's a loan or a contribution changes what each of you owns and what each of you gets.
In insolvency. Documented creditors, including owner-creditors, sit differently from owners.
For tax. Basis, deductibility, and the character of what comes back to you all turn on the classification.
What "documented" means
For a loan: a promissory note with a rate, a term, and repayment provisions. Actual repayments that match it. Interest reported.
For a contribution: a record in the company's books showing the amount and the resulting capital account.
A note the company never repays and never reports interest on will not persuade anyone it was a loan.
The common failure
An owner transfers money from a personal account to the business account with no memo, no note, and no entry. Three years later, on a sale or in a dispute, nobody can say what it was.
What to do
Decide before you transfer the money, write it down, and follow it. Ten minutes at the time; unrecoverable afterward.
If several years of this went undocumented, that's worth an entity tax classification analysis.
This is general information, not legal advice for your situation. If you want an answer for your business, book a consultation.
