Shareholder Loan Agreement

When a corporation borrows money from a shareholder or ends up owing money to a shareholder in any way, a Shareholder Loan Agreement serves to document the loan in accordance with regulatory requirements.

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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.

What Is a Shareholder Loan Agreement?

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.

Other Names for Shareholder Loan Agreement

Depending on your state, a Shareholder Loan Agreement may also be known as:

  • Stockholder Loan Agreement

  • Shareholder Loan to Corporation

Who Needs a Shareholder Loan Agreement

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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How to Create a Shareholder Loan Agreement with 360 Legal Forms

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.

Let 360 Legal Forms help with our extensive library of attorney-vetted legal forms. The process is fast and easy. All you have to do is fill out our easy-to-understand questionnaire. Once complete, simply download your form as a PDF or Word document from your secure online account.

What Information Will I Need to Create a Shareholder Loan Agreement

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.

Shareholder Loan Agreement Terms

  • 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

Shareholder Loan Agreement Signing Requirements

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.

What to Do with Your Shareholder Loan Agreement

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.

Frequently Asked Questions

The Shareholder Loan Agreement is specifically designed for corporations to borrow money from shareholders. In the opposite case, a promissory note or a standard loan agreement will be more suited to document the transaction.

A promissory note is a less official document than a loan agreement. It records a debt between any two parties without much detail and leaves room for the terms of the loan to be changed if both parties agree to the changes. A loan agreement, on the other hand, explains the loan terms in detail and binds both parties to abide by those terms or face specific penalties.

There is no statutory requirement obliging shareholders to charge interest for a loan to a corporation. However, a loan with no interest or one that substantially diverges from reasonable terms in the open market may draw the attention of federal and state authorities and could result in significant penalties.

Typically, tangible assets are used as collateral for any loan. This may include buildings, equipment, and business inventory. However, it’s also possible to use accounts payable as collateral as well as other securities as long as the terms of the loan are agreeable to both parties.

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Applicable to all 50 states
Applicable to all 50 states

Our documents are vetted by lawyers and are applicable to all 50 states.