Sometimes, a corporation may need to borrow money, so instead of seeking a loan from the market, they can ask a shareholder to lend them money. Whenever a stockholder lends money to the corporation, the corporation should document the loan in a shareholder loan agreement. In other words, it serves as an IOU between the corporation and the shareholder. But it also serves much more important purposes, such as avoiding the burden of taxation on the shareholder when the borrower repays the loan.
Essentially, a shareholder loan agreement details the terms and conditions of a loan between a corporation and a shareholder. In the agreement, funds transfer between the two parties for any purpose, and the borrower must repay according to the terms of the agreement.
The agreement isn’t limited to transferring funds directly between a corporation and a shareholder. If a corporation owes a shareholder money for salary purposes, this may serve as the basis of a shareholder loan agreement. The corporation’s board meeting minutes should record these transactions to avoid regulatory complications.
Note that shareholder loans to and from a corporation must follow specific protocols to avoid regulatory complications. The terms of the loan align with market standards.
Further, if a person is both a shareholder and an employee, the company can use a director loan agreement or shareholder loan agreement.
Due to the relationship between the borrower (the company) and the lender (the director/shareholder), a director/shareholder loan may or may not contain plenty of representations and warranties or even any obligations on the borrower’s part.
Unlike salary and dividend payments, shareholder loans allow shareholders to withdraw funds without incurring tax liabilities. In addition to creating planning opportunities, this benefit also creates more opportunities and incentives for shareholders to misuse the rules. The Income Tax Act will therefore automatically include the principal loan amount of any shareholder loan into the taxpayer’s income. In addition, the loan must meet one of the following conditions to avoid costly or unintended tax consequences.
A corporation’s board of directors or acting directors prepare the terms of the shareholder loan agreement to document the loan terms. Shareholder loan agreements are a good way to document a shareholder’s loan to a corporation. Besides serving as a record of the transaction for the corporation’s internal documents, the agreement proves to government authorities that the loan was made according to regulatory requirements. As a result, if the debt is recorded incorrectly, the shareholder could face double taxation when it comes time to collect.
We have included a shareholder loan agreement template in Word for you below. Please include the following information when creating your document:
State legislation regulates shareholder loan agreements when the corporation is incorporated.
Details about the corporation, such as its name and its formation date
The amount the company borrowed
The schedule for repayment of the debt (whether a fixed schedule or a lump sum)
Shareholder’s name and address
Shareholders will receive assets if the corporation fails to repay the loan per the terms of the shareholder loan agreement, if applicable.
The borrower (the corporation) incurs charges should the borrower fail to pay on time or default on the loan. If there’s a stipulated late fee, it should be charged before a default occurs.
You will need the following information when creating a shareholder loan form.
Names of the corporation and the individuals who make the shareholder Loan agreement.
You can use our printable shareholder loan agreement example that you can download and open in Word or as a PDF. Make sure to check your local governing state laws, and if you have any questions, consult licensed attorneys or better yet, a shareholder disputes lawyer. Our free shareholder loan agreement template is available below.
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Frequently Asked Questions
It is important for a corporation to write a shareholder loan agreement when it owes or borrows money from its shareholders to explain the loan terms and prove the corporation’s debt to the shareholder. The corporation can also use this to document wages owed to its employees if that employee is a shareholder.
Let’s talk about the differences between these two documents now that we’ve learned about their similarities.
Promissory notes are often used for friend and family loans, as well as for short-term, small loans. In general, they are more for informal relationships than loan agreements. Most banks and other large financial institutions have specific loan documents they use based on the type of loan. They use loan agreements for everything from cars to mortgages to new business ventures.
Even though both documents bind borrowers, a loan agreement also binds lenders. That’s because lenders sign a loan agreement but not a promissory note. Even though the lender signs a loan agreement, it’s not often they actually bind themselves to anything. The word “bind” does not tell the whole story here. In contrast, the loan agreement will be full of information about the lender’s rights. In most cases, the lender does not promise to do something like the borrower does but rather acknowledges that the lender made the loan, as well as their rights, which often include how to handle the situation if the borrower does not pay, as well as what dispute resolution options are available.
Due to the very specific terms required for large, complex loans, loan agreements are generally longer and more complex than promissory notes. As a matter of fact, most financial institutions use several form clauses in their loan documents their attorneys developed over the years, honing the loan requirements and adding more information as needed. As a general matter, loan agreements are usually more complex than promissory notes, but that isn’t to say promissory notes cannot be complicated.