Shabbat Parashat Vayikra 5778

Ask the Rabbi: Use of a Heter Iska when Lending Money to One’s Company

Question: I am a general partner (having special authority and responsibility) in an LLC (Limited Liability Company) with only Jewish partners. In order to facilitate a real estate purchase, some of us lent money to the company (we have the authority to do so at market rate interest or invest for equity) without a heter iska. Does one need a heter iska to lend money to an LLC, and if yes, can we do one now?

Answer: Rav Moshe Feinstein (Igrot Moshe, Yoreh Deah II, 63) posits that the prohibition on ribbit applies only when there is a full-fledged borrower, one who has a personal obligation to pay, beyond having a lien on his assets. In an LLC (as well as a corporation), no individual has a personal obligation to pay; only an amorphous financial entity has to pay, with its assets seized if necessary. While a Jewish-owned LLC may not take interest from Jews, he rules that Jews can take interest from the company.

Not all poskim accept Rav Moshe’s logical but novel leniency, but many agree on the level of Torah law, and it is seen as a legitimate opinion one can choose to rely upon it (see Torat Ribbit 17:52-54; Laws of Ribbis, p. 105). It is generally recommended (see ibid.) to use a heter iska when lending money to a Jewish-owned corporation (Israeli banks have heter iskas). This makes the return on the money given linked to an investment (in which the money is not guaranteed but, fundamentally, based on the recipient’s success).

Yet, you face challenges in implementing a heter iska. First, the fact that you did not have one at the time of the loan was a problem; your money is now a loan, not an investment, so the return you seek is ribbit. You can redo the process and turn the money into an iska investment. The best thing is for the money to be returned and then given again with a heter iska (Laws of Ribbis, p. 404). The partner-lenders and the company can also do a kinyan sudar to transfer assets to the lenders in lieu of payment and then give them back to the company as an iska (ibid.; Torat Ribbit 16:28-29; Brit Yehuda 40:23).

The second problem is that it does not fix things retroactively. Therefore, you cannot take interest due before this process, which might be a lot of money. Some poskim allow raising the rate of return in the heter iska, which is somewhat flexible (Netivot Shalom, Kuntrus Heter Iska 25), but only when it is not clear that it is to make up for relinquishing past ribbit. In your case, you are supposed to receive only an accepted interest rate, so it does not seem feasible, on practical and halachic grounds, to raise the rate.

Finally, the full provisions of the heter iska likely do not work for you. In an iska, one cannot promise the investor a given return, which must be a product of profits. The reason the projected return is usually given is that to pay less, the iska recipient must corroborate lack of gains by oath and losses with witnesses. Otherwise, we assume profits. Many poskim (see Torat Ribbit 27:11) rule that this cannot be done when the investor is a partner in the business because when the investor knows there were not enough profits, he cannot demand proof of what he knows. Therefore, receiving the expected returns when they are not justified is ribbit. Some are lenient on the matter (ibid. (24)), but the stringency is logical. You could make the heter iska and use it for cases where there are profits. Realize that you would have to accept the risk of losses that you would know about. How would the heter iska help at all? The value would be in cases when there are apparent profits but it is hard to quantify them, so the heter iska sets clear return assumptions.

In summary, it is legitimate to rely on Rav Feinstein and not worry about anything. If you want to do a heter iska, it can be done, but if you want to use it even for cases where there were not gains, it is questionable whether it helps and will probably not allow profits on the past. You may want to just end the loan and, from this point and in the future, take the equity approach.

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