October 7, 2026 | 15

How to lend money to your business the right way

People put thousands of their personal money into their business and assume that the business will pay them back on top of profits or other forms of business income. It could be fine. The IRS may never look closely. But a loan without loan documents is precarious.

What are loan documents?

Loan documents are, at least, a loan agreement and a promissory note. These are legally binding contracts between you and your business in which the business promises to pay you back, with interest. You can make the terms of the loan favorable to the business–it doesn't have to be a shakedown when you want to collect. But it does need to be legally documented.

What happens if there are no loan documents?

Lending your business money without proper documents has a few consequences:

1. Your business has no legal duty to pay you back

This might not sound like a big deal, especially if your business isn't making much money. But if your business is making money and has other documented creditors, your loan may not even be on the map in terms of priority to be repaid. Indeed, if it gets to the point of bankruptcy, there is little chance you would get those funds back even if you considered yourself a creditor of the business.

2. You might have to pay income tax on the repayment

When you get repaid for a loan, that's not usually considered taxable income (because it is a debt to be repaid, not earnings). But if the IRS looks closely at your "loan" and finds no legal documentation, it might make the loan go poof (reclassify the loan) and make you pay income tax on the repayment.

3. Your business cannot legally deduct the loan payments as business expenses

Loan payments to creditors are tax-deductible business expenses. But again, if the IRS looks closely and there is no loan documentation, it may reclassify the loan and the payments by your business will no longer be tax deductible.

This goes for any time you lend money to anyone, not just your/ a business. If you want the other person to have a legal duty to pay you back or if you want to ensure you are paid back if that person sells a major asset or goes bankrupt, you need loan documents.