Family Loan to Single-Member LLC

I have a client that has a single-member LLC. He will have a loss for 2022. His parents want to loan him $75k to finance a build-out of a new facility. What is the best way to ensure that this loan is considered a recourse loan with respect to the owner's tax basis in the LLC? Thanks very much for any insight.

Is the LLC being taxed as an S-Corp or is he reporting on a Schedule C?

I don't think there are any basis issues to be worried about if it hasn't elected to be treated as a corp. It is a disregarded entity for tax purposes otherwise. With that aside, if the owner guaranteed the note, that would suffice to include it as an amount "at risk" according to section 465(b)(2)(A), as well as define it as recourse, according to the definition of recourse in treas reg. 1.752-1(a)(1) (although this isn't a partnership).

If he did make an election to be an S corp, then the way to get basis is to have the parents personally loan him the money, and then he would contribute the money to the corp. He wouldn't get basis for a loan directly to the corp, even if he guaranteed it.

Assuming the SMLLC is a disregarded entity, he has no basis in it. And if the loan is, under state law, a recourse loan, and parents don't intend it as a gift, and it has the characteristics of a loan, he's at risk for it and can deduct losses that are financed by the loan. If the parents want the loan to be secured by the "facility", and even if not, read and apply carefully section 465(b) and let us know where you come down with your specific facts.

Seaside, the LLC is reported on Schedule C.

It'll ultimately come down to state law, but generally having him sign a personal guarantee or making him jointly and severally liable will do the trick.