Can shareholder borrow money from corporation?

It is common that sometimes shareholder borrows loan from corporation to take care of their urgent needs. It is fine for the borrowing activity; however, we need to be cautious of potential tax consequences it could cause as result of this event. If not handled properly, IRS could categorize the borrowing as either compensation or dividend, it just depends. I always suggest documenting this loan properly with shareholder loan agreement signed by applicable parties. Loan agreement should clearly state the loan term, including loan amount, interest rate, loan length and repayment structure, etc. key information. For interest rate, it should always be higher than AFR (applicable federal rates), AFR rates is published on IRS website periodically.

Special attention needs to be given to S Corporation when dealing with shareholder borrowing loan from company. Without proper document, IRS could treat borrowing as additional distribution. S Corporation requires that distribution needs to be proportionate to shareholder percentage, in this case disproportionate distribution will jeopardize S Corp tax status.

In the end, this loan needs to be bona fide loan. Contact me if you have any questions.