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Share Holder loans

Basic Tips for Shareholder Loans

Shareholder loans are a fact of life for most entrepreneurs. Why? Because most start-ups and smaller companies don't have sufficient cash flow to support day-to-day operations, so the owners are constantly moving personal funds into and out of the business in order to keep things running. In most cases, these loans are usually undocumented and poorly tracked (reason: business owners are usually too busy doing other things to pay attention to proper recordkeeping). In order to avoid headaches down the road, here are three basic tips to keep in mind:

First: if possible, document the loan in writing at the outset. You don't need a lawyer to do that, just draft a simple note that includes the principal amount (ex. $25K), the interest rate (any amount over $10K requires the charging of interest- two points above the prime rate is a good rule of thumb), and the payment terms ("payable on demand" is the most common). Sign the note (twice if you are the only shareholder- once as borrower and again as lender) and keep a copy in your files. If you're uncomfortable drafting this on your own, you can fill out an online form for $12.50 at (Note: if you don't do this, don't have a heart attack- it can always be done after the fact. From an accounting point of view, the next two tips are more important.)

Second: for heaven's sakes, please set up a simple spreadsheet to track the loan activity. Nothing fancy, three columns will do: date, amount and a brief description (ex. "Transferred from personal bank account to company," etc.). Every time you put money in or take money out of the company, record it on the spreadsheet (money in as positive, money out as negative). This will help your accountant tremendously when it's time to prepare financial statements or get your tax return completed.

Finally: if you're doing your own books, set the loan up as a separate liability account (ex. "Shareholder Loan- Jeff Skilling") and record all activity to that account. Don't worry about recording interest vs. principal (nobody ever seems to get that part right, anyway). However, it will be quick and easy for your accountant to figure out later if you post all loan activity to the one liability account (much easier than the usual drill, which involves combing through cancelled checks and bank statements for several hours).

Applying for a loan is now easier online than ever before. You can compare rates, and find loan products for just about any situation or credit worthiness status. Check all lender terms and find a loan that works for you.

(Note: these tips apply to corporations, not sole proprietorships, where funds to and from the business flow through owners' equity accounts.)