In plain English
Document terms and keep it separate from contributions and distributions. It affects basis in an S corporation.
Ask your preparer how to treat it.
Why it matters
In a corporation, money moving between the owner and the company needs a clear label. Without one, it is unclear whether a transfer was a loan, a contribution, a distribution or wages, and each is treated differently. Mislabeling can affect how your preparer handles the return and can raise questions if the company is ever examined.
A documented loan also makes it clear how much the company owes you, or you owe it, if the business is sold or closed.
Worked example
An owner lends $10,000; repaying $2,000 reduces the loan, not income.
How to handle it
- Create separate accounts for loans from shareholders and loans to shareholders.
- Write a short loan agreement with the amount, repayment plan and any interest terms.
- Record each transfer and repayment to the loan account with a memo referencing the agreement.
- Reconcile the balance to your own records at year end and share it with your accountant.
Common mistakes
- Recording money the owner puts in as revenue, which overstates income.
- Letting personal expenses paid by the company build up as a loan to the owner with no plan to repay, which your accountant may need to reclassify.
- Recording repayments to the owner as an expense, which understates profit.
Not the same as: Capital contribution
A shareholder loan is meant to be repaid and creates a liability or receivable. A capital contribution is an investment in the business with no repayment expected, and it increases equity. See Capital contribution.
Go deeper
- S Corporation Bookkeeping: What Changes From an LLC: How the books change once a business is taxed as an S corporation: owner payroll, distributions, shareholder loans and basis records.
- Owner Equity and Capital Contributions Explained: How to record money an owner puts into a business, what equity accounts do, and how contributions differ from loans and income in your books.
Related terms
- Shrinkage: Inventory lost to theft, damage, error or spoilage, found by comparing counts to the books.
- Suspense account: A temporary account for transactions you cannot yet classify.
- Sales tax payable: Sales tax collected from customers that you owe to the state.
Common questions
What is a shareholder loan?
Money an owner lends to the business or the business lends to an owner, tracked as a loan.
Can you give an example of shareholder loan?
An owner lends $10,000; repaying $2,000 reduces the loan, not income.
Should a shareholder loan charge interest?
Terms and interest can have tax consequences for both you and the company. Ask your accountant how to set them up before the money moves.
Can the shareholder loan account have a balance in either direction?
Yes. It shows a liability when the owner has lent to the company and a receivable when the company has lent to the owner. Keeping two separate accounts makes the direction obvious.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.