Examples:

• • Ava, an actress, forms Ava Star Productions, Inc. Her agent negotiates a role for her in a film. The production company contracts with and pays Ava Star Productions, which in turn pays Ava as its employee.
  • Simon, a management consultant, operates his practice through Simon Consulting, LLC. His client engages and pays the LLC for his advice on a project, and the LLC compensates Simon as an employee.

How to Proceed:

• • Determine if a loan out company is the right structure for your professional endeavors based on your industry, income, expenses and liability risks.
  • Consult a knowledgeable attorney and tax advisor to assess the pros and cons of forming a loan out in your specific circumstances.

FAQs:

• • What’s the difference between being an employee of my loan out vs. an independent contractor? With a loan out, you gain employee benefits, legal protections and tax treatment. Independent contractors have fewer benefits/protections.
  • Can I still work for multiple clients with a loan out company? Yes, your loan out can contract with and invoice multiple clients, allowing you to maintain multiple income streams.

Examples:

• • Emilio set up Emilio Sanchez Enterprises, Inc. as an S-corp in California to loan out his services as a sound engineer. He filed articles of incorporation, bylaws, and obtained an EIN and LA business license.
  • Sienna and her accountant determined an LLC was the best loan out entity for her work as a graphic designer. She filed LLC articles with her state, an LLC operating agreement, and a fictitious business name statement for “Sienna Designs.”

How to Proceed:

• • Evaluate whether a C-corp, S-corp or LLC is the ideal entity type for your loan out based on tax status, ownership structure, and management.
  • Choose a loan out company name that is professional and unique from your personal name. Consider name availability and registration requirements.
  • Engage an attorney to properly prepare and file your loan out formation documents and governing agreements to ensure legal and tax compliance.

FAQs:

• • Can I form my loan out company in any state? Yes, but most incorporators choose the state where they primarily do business.
  • How much does it cost to set up a loan out? Fees vary by state and entity type, but usually include at least filing fees, registered agent fees, and attorney/accountant charges for advice and document preparation.

Examples:

• • Mia’s loan out company signed an agreement to provide her writing services to a studio and invoiced them $5,000 per week. It put Mia on payroll, paid her $1,000/week in salary, and withheld taxes.
  • Liam’s loan out had him sign an employment agreement spelling out his $100,000 annual salary, duties, benefits and conditions. It paid him biweekly, less withholdings, and issued him a year-end W-2.

How to Proceed:

• • Ensure any contracts for your services are between the client and your loan out company directly. Specify the services, compensation, payment terms clearly.
  • Have your loan out invoice the client for services provided and collect all income. Maintain separate business financial accounts and records.
  • Consult an attorney to draft a tailored loan out-talent agreement covering your pay, benefits, duties, term and termination, IP rights, and other key employment terms.
  • Work with an accountant to set up payroll, calculate withholdings, issue paychecks and W-2s/1099s, file taxes and maintain proper financial records.

FAQs:

• • Can I just have clients pay me directly and skip the loan out? That would negate the legal separation and benefits of the loan out structure. For it to work, the loan out must contract and collect the income, then pay you.
  • What if a client insists on hiring me directly as an individual? Try to educate them on your loan out and that they need to engage it, not you personally. If they refuse, consider if you’re willing to give up loan out benefits for that job.

Examples:

• • Marcus’ loan out paid him a $150,000 salary for his engineering services, in line with industry standards. It deducted health insurance, a 401(k) match, and $10,000 in travel costs.
  • Aliyah’s loan out was careful to maintain its limited liability status by not pledging company assets for her personal real estate loan. She always signed service agreements as “Aliyah Designs, LLC” only.

How to Proceed:

• • Work with your accountant to determine a “reasonable” salary figure for your role and industry to stay IRS-compliant. Don’t purposely underpay yourself.
  • Track and deduct all ordinary, necessary, documented business expenses on your loan out’s tax return. Common items include insurance, home office, mileage, travel, and more.
  • Preserve the “corporate veil” by always acting in the loan out’s name, not yours personally. Avoid guaranteeing or comingling company debts or assets with your own.
  • Properly document all loan out transactions, maintain corporate records, hold ownership/board/shareholder meetings as required, and keep things professional.

FAQs:

• • What’s a “reasonable” salary and who determines that? It depends on your industry, experience, workload and revenue, but a good rule is to pay yourself at least what you’d make as a regular employee in your field. Your accountant can advise.
  • Can I still be held personally liable if I have a loan out? Usually only if you commit fraud, negligence, or fail to keep your loan out legally separate. Proper records and not mixing business with personal matters is key.

Questions: Loan Out Basics

• • 1. What is the primary purpose of a loan out company?
    • A) To loan money to clients
    • B) To contract with clients to “loan out” your services
    • C) To sponsor employee visas
    • D) To hold intellectual property rights
  • 2. Which of the following is NOT a common reason to form a loan out?
    • A) Personal liability protection
    • B) Tax deduction opportunities
    • C) Anonymity of ownership
    • D) Retirement plan options
  • 3. Who is considered the “employee” in a loan out arrangement?
    • A) The client receiving services
    • B) The loan out company itself
    • C) The owner providing services
    • D) The loan out’s vendors
  • 4. True or False: A loan out company is typically formed as a partnership.
    • A) True
    • B) False
  • 5. Which profession would LEAST commonly use a loan out?
    • A) Actor
    • B) Consultant
    • C) Retail Clerk
    • D) Musician

Answers: Loan Out Basics

• • 1. B) The main purpose of a loan out is to contract with clients to provide or “loan out” the services of the owner.
  • 2. C) While loan outs offer liability protection, tax benefits and retirement options, anonymity of ownership is not a primary reason people use them.
  • 3. C) In a loan out, the company owner who provides services to the client is treated as an employee of their own loan out company.
  • 4. B) False. Loan outs are usually formed as corporations or LLCs, not partnerships.
  • 5. C) Loan outs are most common among professional service providers and creatives like actors, consultants and musicians – not retail workers.

Questions: Loan Out Operations

• • 1. Which of the following is most important to preserve the liability protection of a loan out?
    • A) Paying yourself a very high salary
    • B) Keeping loan out and personal assets separate
    • C) Investing loan out income in the stock market
    • D) Having a “doing business as” (DBA) name
  • 2. What does the IRS require loan out owners to pay themselves?
    • A) Minimum wage for their state
    • B) A “reasonable salary” for their role
    • C) Whatever the owner chooses
    • D) No requirement exists
  • 3. Which document governs the relationship between the owner and their loan out?
    • A) An employment agreement
    • B) The company bylaws
    • C) The owner’s last will & testament
    • D) The client services contract
  • 4. To maintain a loan out’s legal status, the owner should avoid:
    • A) Saying “I” instead of the company name
    • B) Using loan out funds for personal purchases
    • C) Personally guaranteeing loan out debt
    • D) All of the above
  • 5. True or False: Loan outs can deduct more business expenses than individuals.
    • A) True
    • B) False

Answers: Loan Out Operations

• • 1. B) Keeping the loan out legally and financially separate from the owner’s personal affairs is critical to preserving liability protection.
  • 2. B) The IRS requires loan out owners to pay themselves a “reasonable salary” based on market rates for their role and industry.
  • 3. A) An employment agreement between the owner and loan out company should detail the terms of their work and compensation arrangement.
  • 4. D) Loan out owners should keep business and personal matters separate in contracts, finances, and all communications to preserve the corporate veil.
  • 5. A) True. Loan outs can take many ordinary business expense deductions not available to individuals, yielding significant tax savings.

Disclaimer

The information in this article provides a general overview of loan out companies and how they work. It is not intended as legal, tax, or financial advice for your specific situation.

To determine if a loan out company is right for you and how best to structure it, please consult with qualified legal and tax professionals. They can evaluate your unique circumstances and goals to provide personalized guidance to maximize the benefits and minimize the risks of using a loan out.