Sometimes, a corporation may need to borrow money, and instead of seeking a loan on the market, it can request to take a loan from a shareholder. If a shareholder agrees to lend money to the corporation, that loan should be documented in a Shareholder Loan Agreement with the corporation.
The Shareholder Loan Agreement acts as an IOU between the corporation and the shareholder who loaned it money. However, it has a much more critical purpose, including avoiding creating a tax burden for the shareholder when the loan is repaid.
A Shareholder Loan Agreement is a legally binding contract between a corporation and a shareholder detailing a loan's terms. It records a transfer of funds for any purpose between the two parties that must be repaid under the terms stipulated in the agreement.
It's not limited to a direct transfer of funds between a corporation and a shareholder or vice versa. If a corporation owes a shareholder money for salary purposes, that may form the basis for a Shareholder Loan Agreement.
Note shareholder loans to and from a corporation need to follow specific protocols to avoid running into regulatory complications. For instance, it's useful to record these transactions in the corporation's board meeting minutes. The terms of the loan should reasonably approach the standard terms on the open market.
Depending on your state, a Shareholder Loan Agreement may also be known as:
Stockholder Loan Agreement
Shareholder Loan to Corporation
Corporations use Shareholder Loan Agreements to document loan terms. A corporation's board of directors or acting directors prepare the terms of the Shareholder Loan Agreement.
When loaning money to a corporation, a shareholder should document the transaction with a Shareholder Loan Agreement. The agreement serves as a record of the transaction for the corporation's internal documents and as proof to government authorities that the loan was made following regulatory requirements. If the debt is recorded incorrectly, it could result in double taxation for the shareholder when the time comes to collect.
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A Shareholder Loan Agreement needs to be drafted correctly to satisfy state and federal regulations or risk attracting the tax authorities' attention and the SEC (Securities and Exchange Commission), the latter if it's a public corporation. With our proprietary form generator, all you need to do is answer a few simple questions about the transaction. We will generate a document fitting the regulations in your jurisdiction.
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To create your document, please provide:
Governing State: The state where the corporation is incorporated and whose legislation regulates the Shareholder Loan Agreement's terms.
Corporation Details: The name, formation information, and other relevant details of the corporation.
Principal Amount: The amount of money borrowed by the corporation.
Payment Schedule: The timeline on which the debt will be repaid (whether the payments will be delivered on a fixed schedule or a lump sum).
Shareholder Details: Name and address of the shareholder providing the loan.
Security: Corporation assets the shareholder will receive if the corporation fails to repay the loan per the Shareholder Loan Agreement's terms, if applicable.
Late Payment and Default: Additional fees added to the loan if the borrower (corporation) fails to pay the loan on time or defaults on the loan altogether. The late fee, if stipulated, should be incurred before a late payment becomes an event of default.
Absolute Obligation: A contractual obligation allowing no alternative action and is unconditional as long as the contract is enforceable
Enforceability: A part of the Shareholder Loan Agreement guaranteeing it can be enforced in a court of law
Affirmative Covenants: Parts of the contract stating specific actions that one or both parties observe for the contract to remain valid
Event of Default: A condition or conditions allowing the shareholder to demand immediate repayment of the loan or to seize the property offered as collateral in the agreement
Severability: A part of the agreement making it valid even if a part or provision in it turns out to be unenforceable
The Shareholder Loan Agreement only needs to be signed by a representative of the corporation. The lender may also choose to sign the agreement, but it's not required.
To be legally enforceable, a Shareholder Loan Agreement needs to be signed in the presence of unbiased witnesses, and the signatures need to be notarized.
An executed copy of the Shareholder Loan Agreement should be filed in the corporation's records and noted in the board meeting minutes. Additionally, distribute a completed copy of the agreement to the lender (shareholder) for their records.
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