What is a Shareholder Loan Agreement?
A Shareholder Loan Agreement documents a private loan from a shareholder or stockholder to a company. Use a Shareholder Loan Agreement to create an enforceable agreement between two related parties when:
- A shareholder is lending money to its corporation.
- A corporation owes money to a shareholder (for salary, etc.), and the parties need a record of the payment for tax purposes.
A Shareholder Loan Agreement is also known as a:
- Stockholder loan agreement
- Shareholder loan to a corporation
- Shareholder loan to a company
- Shareholder loan
- Director’s loan
- Director loan to a company
Who are the parties to a Shareholder Loan Agreement?
The two parties to a Shareholder Loan Agreement are the shareholder and the corporation.
The shareholder (or stockholder) is the party that lends money to the corporation on the condition that the corporation will repay the loan in the future. To be a shareholder, this party must own shares in the corporation. The shareholder is the same as a debtor or lender.
The corporation is the party that borrows money from the shareholder on the condition that they will repay the money in the future. If the corporation liquidates, then they must pay all loans (including shareholder loans) before the shareholders can recover any equity from their shares.
How do I create a Shareholder Loan Agreement?
Our free Shareholder Loan Agreement template clearly outlines the steps required to complete a legal document that's valid in your state or territory. Complete the questionnaire by following these steps:
1. Determine how the corporation will make payments
Start by determining how the corporation plans on paying back the loan. The corporation can choose to pay:
- A lump-sum payment at the end of the term
- Periodic payments with the balance owing at the end of the term
- Regular payments, including interest
- Interest payments during the term and pay the loan back after the term
2. State the term length
The term is the period over which the loan is outstanding. At the end of the term, the corporation should have repaid the loan and any accrued interest. You can choose that the corporation to repay the loan:
- On a specific date
- Upon notice from the shareholder to repay
- After a selected number of months
- After a selected number of years
Specify if the corporation can pay the outstanding principal amount without penalty. This ability allows the corporation to pay down the principal at any time without having to pay an additional sum as a penalty. Typically, a corporation can repay the outstanding balance early without penalty.
3. Specify the loan amount
State the amount that the shareholder is lending to the corporation.
If applicable, you will also need to determine the interest percentage. Interest is an amount charged to the corporation for the use of the shareholder's money. Express this number as a percentage of the amount borrowed.
Interest can also compound monthly or yearly. Compounded refers to how frequently the interest is calculated and added to the principal amount of the loan. The more often interest compounds, the more interest the corporation will pay to the shareholder.
If you would like to create an interest-free loan from a shareholder to a company, list the interest amount as zero.
4. Determine the payment details
If the corporation is making payments, determine if it will pay yearly, monthly, or weekly and specify a payment due date. You can also include an address where the company can send the payments.
5. Provide both parties’ information
Include the name and address, including city, street, state or territory, and postcode, for the shareholder and corporation.
6. Address miscellaneous matters
There are a few additional details to address before finalizing the agreement, including collateral and default.
Collateral
If the shareholder decides to secure the loan by requesting collateral from the corporation, describe the collateral (e.g., all motor vehicles owned by the corporation).
Securing the loan with collateral allows the shareholder to receive compensation if the corporation fails to make repayments. It’s useful in cases where there is a high risk the corporation will default, or the loan is large.
If there isn’t collateral and the corporation doesn’t pay, the shareholder will need to go to court before seizing any of the corporation’s assets.
Default
If the corporation fails to repay the loan according to the terms set out in the Shareholder Loan Agreement, the loan goes into default. Typically, a default will result in the corporation receiving a penalty and the loan being immediately due.
Determine if there will be an increased interest rate if the company fails to make payments, and specify the default interest rate.
Additional terms
If your agreement needs contractual terms that the questionnaire hasn’t addressed, you can list them under this section in our Shareholder Loan Agreement template.
Make sure not to address or contradict an issue previously answered in the questionnaire, and don’t abbreviate words.
7. Sign the document
To finalize the agreement, both parties must sign it. If you know when the parties will sign the document, provide the exact date.
Most documents and contracts don’t require witness signatures to be legally valid. However, some documents have requirements regarding witnesses.
Many banks and other institutions have policies about signing requirements and may refuse to accept documents without witness signatures regardless of their legal sufficiency. If a bank or registry will use your document, check with them regarding any additional witnessing requirements.
Is a Shareholder Loan Agreement taxable?
Yes. If a corporation wishes to avoid paying taxes on a loan, it should return the principal amount of a loan to the shareholder by the end of the fiscal year.
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