What is a shareholder loan?

A shareholder loan is money a shareholder lends to the corporation rather than contributes as capital, creating a debt obligation that the company must repay. For professional service firm owners, shareholder loans provide flexibility in funding the business while maintaining the option to repay.

Key characteristics

• Debt from owner to company

• Creates repayment obligation

• Should bear a reasonable interest

• Documented with a loan agreement

• Different treatment for contributions

• IRS scrutinizes terms

Why it matters for professional service firms

Shareholder loans allow owners to put money in and take it back out without distribution treatment. However, loans must have proper documentation and terms, or the IRS may recharacterize them. Professional service firm owners should formalize shareholder loans through written agreements and at market-rate interest.

Real-world example

Chris needed to fund his S Corp with $50,000. Options: capital contribution (increases basis, taxed when withdrawn beyond basis) or shareholder loan (repayment is a tax-free return of principal). Choose loan structure: documented with a promissory note, 5% interest rate (AFR compliant), repayment terms specified. Repayment was tax-free; interest was income to Chris and a deduction to the S corp.