Shareholder loanDecember 30, 2020
Shareholder loan is a debt-like form of financing provided by shareholders. Usually, it is the most junior debt in the company’s debt portfolio. On the other hand, if this loan belongs to shareholders it could be treated as equityMaturity of shareholder loans is long with low or deferred interest payments. Sometimes, shareholder loan is confused with the inverse, a loan from a company that is extended to its shareholders.
- This form of financing is quite common while funding young companies with positive cash flows because such firms are still not able to raise debt from banks but need debt anyway to create a tax shield.
- The contribution of shareholder loans to a corporation’s capital structure generally relieves the corporation’s debt load and is, therefore, used in leveraged buyouts to manage a degree of leverage.
- Shareholders can extend the loan in distressed or near-default situations to save the company
Are loans to shareholders considered income :
These are generally reported as an asset on the company’s balance sheet (similar to a receivable). The IRS may be critical of shareholder loans and argue that payments made to shareholders should be reclassified as salary (which incurs payroll taxes) or as an equity transaction.
Do shareholder loans have to be repaid :
Shareholders run into problems when they have reduced or depleted their debt basis and the corporation repays any part of a shareholder loan. When the company repays a loan where the shareholder’s debt basis is less than the face value of the loan, the shareholder must take a portion of the repayment into income.