One of the common transactions in a new company is the back-and-forth lending and borrowing of funds from the company's owner. New ventures often have unstable cash flows and owners may go without a paycheck for months on end. If a shareholder needs personal funds but does not want to permanently remove cash from the company, he can withdraw funds from the company using a shareholder loan.
Companies start with at least one shareholder, who is typically the owner and/or founder. A shareholder is an individual who has provided funds to help establish or expand the company. In exchange for providing capital, the person receives shares, or a proportional interest, in the company. A public company has many shareholders, and none of the shareholders may freely borrow funds from the company, because many other shareholders have claim to them. In a small, privately held business such as a sole proprietorship, the owner chooses how to use money generated by the business since he does not have capital contributed by any other owners and the profits all belong to him.
Depending on the nature of the shareholder, he may have the right and ability to borrow funds from the company. Small companies may have a few shareholders that are business partners or family members who contributed start-up capital. An owner of a private company may remove cash from the business for personal use and may either take it as a distribution or a loan. A distribution is not paid back and is considered income of the shareholder by the IRS. A loan allows the shareholder to use the funds and pay them back. For a company with more than one shareholder, the borrower may need to obtain permission from the other shareholders before taking a loan.
Recording a Shareholder Loan
When a shareholder takes a loan from the company, the loan is recorded as a note receivable on the balance sheet, and the cash account is decreased by the amount of the loan. A separate note receivable account should be created and named "Due from Shareholder" to separate this type of receivable from other receivables from the ordinary course of business. If the loan is to be paid back in less than one year, the receivable should be part of current assets on the balance sheet.
Recording Shareholder Loan Payback
When a shareholder borrows funds from the company, he may choose when and how much he wants to pay back. The "Due from Shareholder" receivable account may be paid within one year or it could carry a balance for a significantly longer amount of time. When the shareholder pays back the loan, cash is increased and "Due from Shareholder" is decreased or set to zero, depending on the amount of money paid back.
Cynthia Gaffney has spent over 20 years in finance with experience in valuation, corporate financial planning, mergers & acquisitions consulting and small business ownership. She has worked as a financial writer and editor for several online finance and small business publications since 2011, including AZCentral.com's Small Business section, The Balance.com, Chron.com's Small Business section, and LegalBeagle.com. A Southern California native, Cynthia received her Bachelor of Science degree in finance and business economics from USC.