You own two LLCs. One has cash, the other needs it. You move $25,000 from the first to the second, and both bank feeds label it "transfer". Nothing else happens. No document, no interest, no schedule, and by the time your CPA sees it in February there are eleven more "transfers" going the other way and nobody remembers which ones were repayments.
That is how most intercompany loans between LLCs are born, and it is why they cause trouble on audit, in a lawsuit, and at the sale of either company. This guide shows how to document a loan between two of your own LLCs, how to record it on both sets of books, how each payment splits into principal and interest, and what the IRS expects to see. The same rules apply to a loan from a holding company to a subsidiary and to a loan from you personally to one of your LLCs.
Money moving between two companies you own can be four different things, and the entry depends on which one you meant. A loan creates a receivable in one company and a payable in the other, and it has to be paid back with interest. A capital contribution from a parent to a subsidiary creates an investment on one side and equity on the other, and it is never paid back as such. A management fee is income to the company that provides services and an expense to the one that receives them. A reimbursement moves a cost to the company it belonged to.
Pick the loan only when the money is meant to come back. If Pine Holdings is putting $25,000 into Maple Rentals to fund a renovation that Maple will pay back from rent over two years, that is a loan. If Pine is funding Maple's start-up costs with no intention of being repaid, call it a contribution and book it as one. Calling a contribution a loan, or a loan a contribution, is the first way these get reclassified later.
The document is a promissory note signed by both LLCs. It does not need to be long. It needs to state the lender, the borrower, the principal, the interest rate, the payment schedule, the maturity date, what happens on default, and whether it is secured. Both companies keep a copy; if either LLC has other members, the operating agreement usually requires their consent to lend to or borrow from an affiliate, so get that consent in writing too.
Date the note on the day the money moves, not later. A note signed in February for money that moved in March of the prior year is exactly what an auditor looks for.
Related-party loans have to carry interest at least equal to the IRS applicable federal rate (AFR) for the loan's term. The AFR is published monthly; there is a short-term rate for loans up to three years, a mid-term rate for three to nine years, and a long-term rate beyond that. If you charge less, the IRS can impute the interest anyway: the lender is treated as having received interest income it never collected, and the difference is treated as a transfer of some other kind between the two companies. You end up with the tax on the interest and a reclassification, which is worse than just charging it.
Charging the AFR is enough. You can charge more if that is what a bank would charge, and for a subsidiary with no credit history that is often more defensible. Round to a clean number, write it in the note, and apply it consistently.
On the day the money moves, the lending LLC records an asset and the borrowing LLC records a liability. Use dedicated accounts, one per counterparty, so that the balances can be matched at every close.
| Company | Account | Entry on the day of the loan |
|---|---|---|
| Pine Holdings (lender) | Note receivable, Maple Rentals | Debit $25,000. Cash: credit $25,000. |
| Maple Rentals (borrower) | Note payable, Pine Holdings | Credit $25,000. Cash: debit $25,000. |
The bank feed will still show the $25,000 as a transfer in both companies. Categorize it to the note accounts, not to "transfer" and not to owner equity. At this point the two balances match: Pine shows a $25,000 receivable, Maple shows a $25,000 payable, and the consolidated view for you as the owner eliminates both, because the family as a whole neither gained nor lost anything.
This is the step that breaks in almost every set of small-company books. A loan payment is not one thing; it is two. Part of it is interest, which is income to the lender and an expense to the borrower. The rest is principal, which reduces the note on both sides. The split changes every month, because interest is charged on the remaining balance.
For each payment you need the interest for the period (balance times annual rate, divided by twelve for monthly payments), the principal (payment minus interest), and the new balance. Then four entries: the borrower books interest expense and a reduction of the note payable; the lender books interest income and a reduction of the note receivable.
Pine Holdings lends Maple Rentals $25,000 on March 1 at 6% annual interest, repaid in monthly installments of $1,250 starting April 1. Here is what the first four payments look like.
| Payment | Balance before | Interest (6% ÷ 12) | Principal | Balance after |
|---|---|---|---|---|
| Apr 1 | $25,000.00 | $125.00 | $1,125.00 | $23,875.00 |
| May 1 | $23,875.00 | $119.38 | $1,130.62 | $22,744.38 |
| Jun 1 | $22,744.38 | $113.72 | $1,136.28 | $21,608.10 |
| Jul 1 | $21,608.10 | $108.04 | $1,141.96 | $20,466.14 |
On Maple's books, the April payment is $125.00 of interest expense and $1,125.00 against the note payable. On Pine's books, it is $125.00 of interest income and $1,125.00 against the note receivable. Both companies now show $23,875.00, and that is the number that has to match at the April close.
Now look at what happens if every payment is booked as a "transfer" and the balance lives in a spreadsheet updated once a year. After four payments the spreadsheet says $20,000 (four times $1,250). The real balance is $20,466.14. Pine has $466.14 of interest income it never reported; Maple has $466.14 of interest expense it never deducted. Over a two-year loan the gap is over a thousand dollars, and it is on both returns.
Consumer apps such as Monarch, Copilot and YNAB see the payment as a transfer between two accounts and stop there; they have no concept of a note, a counterparty or interest. QuickBooks Online can carry a note payable and a note receivable, but each LLC is a separate company file, so nothing links the payment on Maple's feed to the receivable on Pine's books; you enter the split by hand in both files, every month, from a schedule you keep somewhere else. Net-worth trackers such as Kubera and Empower let you type a loan balance as a manual asset, which is a spreadsheet with a nicer font.
HaraPro was built around this transaction. Every LLC lives in one login with its own books, and a bank payment can be linked to the specific note it belongs to. The interest and principal split is computed from the note's terms, both sides update at once, the balance is always current, and the payment history builds itself. We checked Mint, Monarch, YNAB, Copilot, Empower, Kubera, QuickBooks and Intuit Lacerte before making that claim; none of them link an individual transaction to the instrument behind it. If you run more than one LLC, the multiple LLCs page shows the setup, and one business is free forever.
Yes. Document it with a promissory note, charge interest at least at the IRS applicable federal rate, record a note receivable in the lender and a note payable in the borrower, and follow the repayment schedule. Check the operating agreements of both LLCs for consent requirements if there are other members.
At least the applicable federal rate (AFR) the IRS publishes each month for the loan's term. Below that, the IRS can impute interest and reclassify the difference. A higher rate is fine if it is what an unrelated lender would charge.
Split it into interest and principal. The borrower books interest expense and reduces its note payable; the lender books interest income and reduces its note receivable. Both balances must match after every payment.
Generally yes for the borrower as a business interest expense, subject to the usual limits, and it is taxable income to the lender. Because both companies are yours, the net effect depends on how each is taxed; the point of documenting it correctly is that each company reports its own side.
A loan that is never repaid and never enforced tends to be recharacterized as a capital contribution or a distribution, with the tax consequences of whichever one it looks like. If repayment is not possible on the original schedule, amend the note in writing and keep making payments.