A Shareholder Loan Agreement is a legal contract that formalizes a lending arrangement between a corporation and one of its shareholders. This document governs situations where a shareholder lends money to the company (a shareholder-to-company loan) or where the company extends credit to a shareholder (a company-to-shareholder loan). Each direction carries distinct legal, tax, and corporate governance implications.

From a corporate law perspective, shareholder loans occupy a unique legal space. Unlike third-party commercial lending, these transactions involve related parties with fiduciary obligations to the company and its other shareholders. State corporate statutes, including the Model Business Corporation Act (MBCA) and Delaware General Corporation Law (DGCL), impose duties of loyalty and care on directors and officers who approve such transactions, requiring that the loan terms be at arm's length — meaning they must reflect fair market conditions.

The tax implications are significant. Under IRC Section 7872, below-market loans between a corporation and its shareholders trigger imputed interest, and the IRS may reclassify a purported loan as a constructive dividend under Section 301 if the arrangement lacks genuine loan characteristics. The IRS examines factors such as whether a promissory note exists, whether interest is charged at or above the AFR, whether a fixed repayment schedule is in place, and whether the borrower has the ability to repay.

Subordination clauses are particularly important in shareholder loans. If the company later seeks bank financing, commercial lenders typically require that shareholder debt be subordinated to the bank's senior debt, meaning the bank gets repaid first in the event of insolvency.

When a shareholder injects additional capital into the company but wants the flexibility of debt rather than equity — preserving repayment priority over equity distributions and potentially deducting interest payments at the corporate level under IRC Section 163.

When the company needs short-term working capital but cannot obtain or does not want to seek traditional bank financing, and a shareholder with available funds offers to bridge the gap.

When a company extends a loan to a shareholder-employee, which the IRS scrutinizes closely. Without proper documentation at arm's-length terms, the IRS may recharacterize the loan as compensation (subject to payroll taxes) or a constructive dividend (taxable to the shareholder without a corporate deduction).

When existing bank lenders require a subordination agreement and the company needs to formalize the terms under which shareholder debt ranks relative to senior commercial debt.

When a shareholder is buying out another shareholder's interest and the company facilitates the transaction through an internal loan arrangement.

Failing to document a shareholder loan creates substantial risk. The IRS can reclassify undocumented transfers as equity contributions, dividends, or compensation, each carrying different and potentially unfavorable tax treatment. Other shareholders may also challenge undocumented loans as breaches of fiduciary duty or self-dealing.

Complete identification of the lending shareholder and the borrowing corporation (or vice versa), including the shareholder's ownership percentage, which is relevant for IRS scrutiny under related-party transaction rules.

The principal amount and disbursement terms — whether funds are advanced in a lump sum or in tranches tied to specific milestones or capital needs. Include the bank account details for fund transfers.

An interest rate that meets or exceeds the IRS Applicable Federal Rate for the loan term (short-term, mid-term, or long-term). Below-market rates trigger imputed interest under IRC Section 7872, creating phantom taxable income.

A fixed repayment schedule with specified installment amounts and due dates, demonstrating genuine loan intent. Demand loans without fixed repayment terms receive heightened IRS scrutiny and are more likely to be reclassified.

Subordination provisions defining whether the shareholder loan ranks junior to existing or future senior debt. Commercial lenders routinely require subordination agreements, and the shareholder loan should anticipate this.

Conversion rights, if applicable, allowing the shareholder to convert the loan principal into additional equity shares at a predetermined price or formula. This requires board approval and compliance with securities laws.

Default triggers and remedies, including cross-default clauses linking this loan to the borrower's other debt obligations. Define whether the lender can accelerate the full balance upon default.

Board authorization documentation, confirming that the company's board of directors approved the loan transaction in compliance with the duty of loyalty and any applicable conflict-of-interest provisions in the corporate bylaws or state statute.

Governing law and dispute resolution, specifying which state's corporate laws apply and whether disputes will be resolved through arbitration or litigation.