Shareholders can provide two types of funding to a corporation: equity investments and loans. An equity investment increases the number of shares owned and the shareholder's ownership percentage. A loan made to the company by a shareholder is treated as an ordinary creditor transaction. The parties should sign a loan agreement that indicates the loan repayment terms. The lending shareholder would have a capital account and a loan account on the company books. If the corporation were to dissolve, the shareholder's loan would be paid first with other creditors before owners would receive a distribution.
Call a meeting of the board of directors. Decisions that affect the position of one shareholder of the company versus the rest should be vetted by the board to address conflicts of interest. Although loans to the corporation by shareholders are common and would not necessarily affect the equity positions of other owners, the loan repayment terms could be considered excess enrichment if not structured properly. Fully discuss the ramifications of allowing loans by shareholders. Establish procedures, loan terms and limits.
Vote to allow the corporation to accept loans from shareholders. Major decisions by the board must be made by a majority vote in favor, in compliance with the corporation's bylaws. Have the board secretary record the discussion and the results of the vote in the meeting minutes.
Prepare a resolution and add it to the meeting minutes. A resolution is a written paragraph memorializing the board's decision. It should be signed by the board chairman.
Execute a loan agreement between the shareholder and the corporation. It is not mandatory to put the terms of the loan into a written agreement, but it is advisable. A written agreement forms a paper trail in case the corporation dissolves, goes bankrupt, is audited or ends up in court. The format of the agreement can be any reasonable expression of the names of the parties, the loan terms and relevant signatures.
Add the resolution, meeting minutes and a copy of the loan agreement to the corporate record book. A corporation is required by law to keep sufficient records to enable shareholders and the Internal Revenue Service to determine the sources of income and status of obligations. Even though a shareholder is an insider, loans must be adequately documented to prevent the appearance of a conflict of interest.
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