Yes, you can take a loan from your business, but only if the business is a corporation or a multi-member LLC, and only if the transaction is set up and run as a real debt. That means a signed promissory note, an interest rate at least equal to the IRS’s minimum for the loan’s term, formal approval by the board or members, and actual payments made on schedule. Miss any of those, and the IRS can reclassify the money as a taxable distribution, wiping out whatever tax advantage you thought you were getting.1IRS practice unit on shareholder debt
Whether Your Business Can Lend to You at All
Start with your entity type, because half of small businesses are structurally incapable of making a loan to their owner.
A sole proprietorship has no legal identity separate from you. The money in the business account is already yours, so moving it to your personal account is a draw, not a loan. There is no second party for a contract to run between.
A single-member LLC that hasn’t elected corporate tax treatment sits in the same place. The IRS treats it as a “disregarded entity,” meaning you report all its activity on Schedule C of your personal return. Because the IRS sees no separate taxpayer, a transfer from the LLC to its sole owner cannot be a loan for federal tax purposes.
Corporations and multi-member LLCs are different. They have their own tax identification numbers and can enter contracts with their owners, loans included. Whether the company is allowed to lend to you specifically usually depends on the corporate bylaws or LLC operating agreement, which may require particular approvals or restrict internal lending altogether. If your governing documents are silent, amend them before any money moves. One flat prohibition to note: publicly traded companies cannot make personal loans to their directors or executive officers under the Sarbanes-Oxley Act.
What Makes It a Real Loan in the IRS’s Eyes
The IRS uses a facts-and-circumstances test to decide whether money flowing from a business to its owner is a genuine loan or a disguised distribution. The underlying question is whether the deal would look the same if the borrower were a stranger. The IRS practice unit on shareholder debt lists several factors, and no single one decides the case:1IRS practice unit on shareholder debt
- A written promissory note signed by both parties.
- A stated interest rate at least equal to the applicable federal rate for the loan’s term.
- A fixed maturity date by which the principal must be repaid.
- A reasonable expectation that the borrower can actually repay from their income and assets.
- Default remedies, such as collateral or a stated creditor priority.
- Actual repayments made on the schedule in the note.
The last factor is where most owner loans collapse. An owner signs a careful promissory note, makes two payments, and then lets the balance sit for years. When an auditor sees that pattern, the note becomes evidence against you rather than for you: it proves the terms existed and were ignored. Consistent, on-time payments matter more than any other single factor on the list.
Setting the Interest Rate
The IRS publishes Applicable Federal Rates (AFRs) each month in a revenue ruling. These rates are the floor for what you must charge. Charge less, and the below-market loan rules under Section 7872 create tax liability on interest nobody actually collected.
The rate you use depends on the loan’s term:
- Short-term: three years or less.
- Mid-term: over three years but not over nine.
- Long-term: over nine years.
For March 2026, the annual-compounding AFRs are 3.59% short-term, 3.93% mid-term, and 4.72% long-term. The rate is locked in during the month the loan is executed. A five-year, $50,000 loan originated in March 2026 needs to carry at least 3.93% annual interest to stay clear of the below-market rules.
Section 7872 does carve out a narrow exception: if the total outstanding loans between a corporation and a shareholder stay at or below $10,000 on any given day, the imputed interest rules don’t apply that day. That exception disappears entirely if one of the main reasons for the low rate is tax avoidance, so it’s realistically useful only for small, short-term advances.
Drafting the Promissory Note
The promissory note has to contain enough detail that a stranger reading it cold understands who owes what, when, and at what cost. At minimum:
- Full legal names of the corporation or LLC as lender and the owner as borrower.
- The exact principal amount.
- The interest rate (at least the AFR) and the compounding method.
- The repayment schedule, whether monthly installments, quarterly payments, or a balloon at maturity, with specific due dates.
- The maturity date.
- Default provisions, including any acceleration clause.
- Whether the loan is secured, and by what.
Collateral isn’t strictly required, but its absence is one more factor the IRS can use to argue the transaction wasn’t arm’s length. For larger loans, pledging real estate, a brokerage account, or another identifiable asset strengthens the case that both sides treated this as a real debt.
Approving the Loan Through the Company
A signed note isn’t enough on its own. The company itself has to approve the loan through its normal decision-making process before any money moves. For a corporation, the board of directors votes to authorize the loan and records the vote in the corporate minutes. For an LLC, the members document approval however the operating agreement requires.
The resolution should identify the borrower, the amount, the interest rate, and the repayment terms, and it should be dated and filed in the minute book. This paper trail proves the loan was deliberate, not something reconstructed after an audit notice arrived. An IRS agent looking at a loan with no board resolution will reasonably conclude the company never actually agreed to lend the money.
Once approved, transfer the funds electronically so the bank record shows a clean trail. The accountant should book the transfer as a loan receivable on the balance sheet, not as an owner distribution. Each payment coming back gets recorded against that receivable. If the company receives $10 or more in interest for the year, it may need to report that interest income and issue a Form 1099-INT to the borrower.
What Happens if You Get It Wrong
The consequences scale from annoying to severe depending on which piece of the structure the IRS attacks.
Imputed Interest on a Below-Market Loan
When a corporation lends to a shareholder below the AFR, Section 7872 treats the shortfall as two deemed transactions: the corporation is treated as distributing the uncharged interest to the shareholder, and the shareholder is treated as paying that same amount back as interest. Both sides get a tax bill on money that never moved. On a $50,000 loan at zero percent when the AFR is 3.93%, the phantom interest runs roughly $1,965 for the first year. It’s an easily avoided cost that creates real expense.
Reclassification of the Whole Loan
The bigger risk is the IRS reclassifying the entire principal as a distribution. For a C-corporation owner, the full amount becomes a dividend. The corporation already paid a 21% corporate tax on the earnings that funded the loan; the owner then pays tax on the dividend at qualified dividend rates that reach 20% for high earners, plus a potential 3.8% net investment income tax for individuals above $200,000 in income ($250,000 for married couples filing jointly). The combined effective rate on those same dollars can push well past 40%.
For an S-corporation owner, reclassification as a distribution is tax-free only to the extent it doesn’t exceed the shareholder’s stock basis. Anything over basis is taxed as capital gain. If the owner had been deducting S-corp losses against debt basis from personal loans made to the company, some of those deductions may have to be recaptured.
Criminal Penalties at the Extreme
If the IRS concludes the loan structure was a deliberate scheme to evade tax rather than sloppy bookkeeping, criminal penalties become possible. Willful tax evasion carries fines up to $100,000 for individuals ($500,000 for corporations) and up to five years in prison. This is the far end of the spectrum, but it exists.
A Warning for S-Corporation Owners
S-corporations add a wrinkle that matters even if you’re only borrowing from the company. Loans running the other direction, from you to the S-corp, create “debt basis” that lets you deduct company losses beyond your stock basis. When the S-corp later repays a loan whose basis you’ve already used up on loss deductions, part or all of the repayment is taxable income to you. Owners who lent money to their company years ago and deducted losses against that basis are sometimes surprised when the company pays them back and they owe tax on the repayment. Loans from the S-corp to the shareholder do not create or affect debt basis.
If the Loan Can’t Be Repaid
If you genuinely cannot repay and the business writes the loan off, the company may be able to claim a bad debt deduction, but only if it can prove the loan was real in the first place. The IRS wants to see that the original transfer was intended as a loan and that the company took reasonable steps to collect before writing it off. The deduction is available only in the tax year the debt becomes worthless.
To qualify as a business bad debt, deductible against ordinary income, the primary motivation for the loan must have been business-related. If the IRS views the loan as primarily personal, it becomes a nonbusiness bad debt, deductible only as a short-term capital loss. That distinction matters: a business bad debt offsets ordinary income dollar-for-dollar, while a nonbusiness bad debt is capped by the capital loss rules.
How an Owner Loan Affects Future Bank Financing
An outstanding loan to an owner can complicate borrowing from a bank. Commercial lenders reviewing your balance sheet see the loan receivable as an asset but know owner loans are often uncollectible in practice. A lender extending a credit line or term loan will frequently require that any existing shareholder debt be subordinated, so the company must repay the bank before repaying you.
A subordination agreement typically bars the owner from collecting payments on the loan, enforcing default remedies, or holding a security interest that competes with the bank’s collateral. If outside financing is on the horizon, an owner loan creates friction in that process and can reduce the amount a bank is willing to lend. Weigh that against the cash you plan to pull out.