Payments for Loans and Leases

A small business owner has a number of withdrawal methods available when seeking to minimize the amount of vulnerable assets within an entity by withdrawing funds from the business.

Using loans and leases has multiple advantages for the small business owner. From an asset protection standpoint, physical property secured by loans and leases running to the owner will not be lost to a creditor when the business owner is also a secured creditor for the property (see our discussion of strategic funding using holding and operating companies). When creditors line up, the business owner will be among the first in line.

Moreover, courts have consistently held that payments for loans and leases are legitimate expenses. These expenses allow the owner to withdraw vulnerable funds from the operation, instead of allowing them to accrue and making them a target.

In addition, payments from corporations for loans and leases are exempt from the self-employment tax if the recipient is not in the regular business of extending loans or leasing property. The limited liability company (LLC) enjoys the same self-employment tax advantage as a corporation when it makes payments for leases and loans, but only in specific circumstances.

• loan/lease tax issues for the corporation
• loan/lease tax issues for the LLC