How to Draft a Promissory Note for Your LLC: A Complete Guide

A promissory note is a legal instrument that contains the terms and conditions of payment of money from the borrower to the lender. Essentially, it spells out the amount of money being borrowed, the time frame for repayment, and the interest payment associated with the borrowed amount. It is a legally enforceable document that acts as evidence of the loan and establishes an obligation for repayment.

Protect Your Business with Indemnity!

Legal GPS templates are drafted by top startup attorneys and are fully customizable🛠️.

Get Template

Trusted by 1000+ businesses to close secure deals.

Do You Need a Promissory Note?

As an LLC member, you may often need to use a promissory note. For example, when arranging a loan from a friend for your LLC or when temporarily injecting your own money into the LLC. It is common for LLC members to inject funds into the company as needed. If you are loaning money to the LLC, a promissory note can be extremely helpful for documentation purposes. In case things go wrong and creditors sue you, having proper documentation helps prove that you and the company are separate entities, ensuring limited liability protection.

How to Draft a Promissory Note

Drafting a promissory note is relatively straightforward. You can use our template and customize it after understanding the key components explained below.

1. Parties

Identify the lender and borrower properly. For example, if you are loaning to your single-member LLC, you will sign as both the lender and the borrower, but in different capacities. As a lender, you are a party in your personal capacity, and as a borrower, you are signing on behalf of your LLC. If your LLC is arranging funds from an outsider, make sure to have the promissory note in the name of your LLC, otherwise you may be personally liable for the loan.

Example Provision:

Lender: John Doe, an individual residing at [Address]

Borrower: ABC LLC, a limited liability company organized under the laws of [State], with its principal office at [Address]

2. Recitals

While not mandatory, recitals can be useful in providing background to the agreement. Recitals briefly explain why the agreement is being entered into, giving context for both parties.

Example Provision:

Whereas, the Borrower has requested a loan from the Lender for business operations, and the Lender is willing to provide such loan under the terms set forth in this Promissory Note.

3. Payment Schedule

Decide how the payments are to be made. Will they be monthly, quarterly, or according to another schedule? Clearly outlining the payment terms will help avoid confusion later on. You should also specify whether there is a grace period or if there are penalties for late payments.

Example Provision:

The Borrower shall repay the principal amount of this Note in equal monthly installments of [Amount] each, commencing on [Start Date], and continuing until the principal amount is paid in full.

Example: If the loan is for $12,000 with monthly payments over a year, you could specify that the borrower will pay $1,000 per month.

4. Amount and Interest

Clearly state the amount being loaned and consider details like whether the interest is compound or simple. As state laws vary regarding the maximum interest rate that can be charged, be sure to reference your state law before setting the interest rate. Failing to comply with these regulations could result in the note being void.

Example Provision:

Principal Amount: Twelve Thousand Dollars ($12,000.00)

Interest Rate: The principal amount shall bear interest at the rate of 5% per annum, calculated on a simple interest basis.

Example: If the interest is simple, calculate it on the principal amount only. For example, 5% interest on $12,000 would be $600 per year.

5. Use of Proceeds

Include the purpose of raising money through the promissory note. When loaning to your LLC, the purpose is usually for business operations. For example, you could state, “The Company will use the proceeds of this note for the operation of its business.” Make sure to check your state law to ensure compliance.

Example Provision:

The proceeds of this Note shall be used by the Borrower solely for the operation and growth of its business activities.

6. Signatures

Do not overlook the signature section, as a promissory note without the borrower's signature is void. If you are loaning to your single-member LLC, you will be signing as both the lender and borrower, but in different capacities. This ensures the agreement is enforceable.

Example Provision:

In Witness Whereof, the parties have executed this Promissory Note as of [Date].

Lender Signature: ______________________ (John Doe, in his individual capacity)

Borrower Signature: ______________________ (John Doe, on behalf of ABC LLC)

7. Governing Law

The governing law provision establishes which state law will govern the agreement and where any disputes related to the agreement may be filed. Typically, it makes sense to use your home state, unless there are unusual circumstances that would warrant choosing another jurisdiction. In most cases, choosing your home state is the best option.

Example Provision:

This Promissory Note shall be governed by, and construed in accordance with, the laws of the State of [Your State], without regard to its conflict of laws provisions.

Additional Provisions to Consider

1. Acceleration Clause

An acceleration clause allows the lender to demand immediate repayment of the entire loan if certain conditions are met, such as a missed payment or if the borrower defaults on other obligations.

Example Provision:

In the event that the Borrower fails to make any payment when due, or if the Borrower defaults under any other terms of this Note, the Lender may declare the entire unpaid principal and interest immediately due and payable.

2. Late Payment Penalty

Including a late payment penalty provision can incentivize timely payments and compensate the lender for delays.

Example Provision:

If any payment due under this Note is not received by the Lender within 10 days of its due date, the Borrower shall pay a late fee equal to 5% of the overdue amount.

3. Prepayment Clause

A prepayment clause allows the borrower to pay off the loan early without penalty. This can be beneficial for both the borrower, who may want to reduce interest costs, and the lender, who may want to receive funds sooner.

Example Provision:

The Borrower may prepay this Note in whole or in part at any time without penalty. Any partial prepayment shall be applied to the principal amount outstanding.

Conclusion

A promissory note is a valuable tool for ensuring that loans to your LLC are properly documented and legally enforceable. By including the key elements discussed above—such as properly identifying the parties, outlining payment schedules, and including signatures—you can protect both yourself and your business in financial transactions.