Looking for Tax/Structure Advice on LLC Loan
Let me start by saying I WILL be discussing this with a professional CPA or attorney. I just want to go into the meeting with as much information as possible, and I know there are some very smart professionals on this forum. Here's the gist of our situation:
My wife and I own an LLC in Texas and are 50/50 managing members with no other members. We currently had a great investment opportunity open up, but most of our cash is tied up at the moment. My wife's parents currently have 100k sitting in a HELOC that is available to draw on for the next 3 years, with a 10-year repayment, at a rate of 4%. Because of our previous successful investments, they have expressed interest in loaning their money to our LLC at an interest rate slightly higher than the 4% they would pay. They are not concerned about making huge money off of this deal and are ok with just pocketing the interest difference and knowing that they're helping up grow our business.
Let me also mention that all parties involved understand the risks. We are all ok financially and would be able to recover if we lost the full 100k.
I'm looking to get some ideas on the best way to structure this so that everything is legit and all parties are protected. For instance, if my wife and I were to die overnight, we want to make sure that her parents at least have a chance at recovering their capital (morbid, but you never know...).
As I previously mentioned, her parents are not members of the LLC. However, they have been wanting to do some business with us for a while and we have been considering adding them. Are there any tax implications between them loaning our LLC the money as members vs non-members? Would it be easier/safer to have them loan this money as members?
My initial concern was that I didn't want them to get double "penalized" on taxes. For instance, they would need to claim the interest that we paid them as income, but they would not be able to claim the interest that they had to turn around and pay to the HELOC because the money was not being used for home repairs. I've heard that they may be able to claim their HELOC interest as an "investment interest expense." But after reading the requirements, it sounded to me like this situation wouldn't qualify them to claim that exemption.
Any and all help from anyone smarter than me would be greatly appreciated!