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A Loan Agreement Stockholder to Corporation is a legally binding contract that documents a cash advance made by a shareholder to the corporation in which they hold equity, establishing the parties' rights and obligations with respect to principal, interest, repayment, default, and priority among creditors. Unlike an informal advance or a capital contribution, a properly structured stockholder loan creates an enforceable creditor-debtor relationship — the corporation owes a legal debt to its own shareholder. This distinction matters enormously for tax characterization: a documented loan with a market-rate interest and a fixed repayment schedule is treated as debt; an undocumented advance may be reclassified by the IRS, CRA, or HMRC as a taxable dividend or equity contribution, with materially different consequences for both parties.
Without a written loan agreement, an informal cash transfer from a stockholder to a corporation is a tax audit waiting to happen. The IRS and CRA actively scrutinize related-party advances and will reclassify undocumented transactions as taxable income or non-deductible equity injections, often years after the fact and with interest and penalties attached. Beyond taxation, a missing agreement leaves the stockholder lender without a legally enforceable repayment claim if the corporation faces financial difficulty — a bankruptcy trustee can subordinate or eliminate an undocumented stockholder advance entirely. Banks and institutional lenders also require written subordination of any stockholder loans before extending credit facilities, meaning an undocumented advance can block the corporation from securing outside financing. This template gives you a board-authorization-ready, AFR-compliant starting point that satisfies auditors, satisfies lenders, and protects both the stockholder and the corporation when the repayment relationship needs to be enforced.
| If your situation is… | Use this template |
|---|---|
| Corporation lending money back to a stockholder | Loan Agreement Corporation to Stockholder |
| Loan between two affiliated companies under common ownership | Intercompany Loan Agreement |
| Short-term unsecured advance with no fixed repayment date | Demand Promissory Note |
| Loan secured against corporate assets or stock | Secured Loan Agreement |
| Stockholder converting the loan to equity at a future round | Convertible Note Agreement |
| Third-party bank or institutional lender providing the loan | Business Loan Agreement |
| Simple fixed-term loan with a single balloon repayment | Promissory Note (Fixed Term) |
Why it matters: The IRS will impute interest at the AFR regardless of what the contract says, creating phantom taxable income for the lender and potentially a non-deductible interest expense for the corporation.
Fix: Look up the current AFR for the loan term from the IRS Revenue Ruling published the month the agreement is signed, and set the contractual rate at or above that floor.
Why it matters: A related-party loan without board approval can be challenged by minority shareholders, voided by a bankruptcy trustee as an unauthorized obligation, or disallowed as a deductible expense.
Fix: Pass a board resolution or written consent approving the specific loan amount, interest rate, and repayment terms before execution, and attach it to the agreement as an exhibit.
Why it matters: Most commercial credit agreements prohibit the corporation from repaying related-party debt ahead of senior lenders — a missing subordination clause can trigger a covenant default under the bank facility.
Fix: Include a subordination clause ranking the stockholder loan behind all senior indebtedness, and notify the corporation's bank before execution if the credit agreement requires consent.
Why it matters: Language like 'repayable when the company has sufficient cash flow' signals to the IRS and CRA that the advance is equity, not debt — exposing the stockholder to taxation on a deemed dividend.
Fix: Specify a fixed maturity date, periodic payment amounts, and an amortization schedule so the repayment obligation is unconditional and commercially reasonable.
Why it matters: A backdated or post-disbursement agreement undermines the legal and tax characterization of the loan — auditors and courts treat it as evidence the transaction was not structured as a genuine arm's-length loan.
Fix: Execute the agreement before or on the same date as the first disbursement, and retain the wire confirmation or check copy as corroborating evidence.
Why it matters: Without default triggers and an acceleration right, the stockholder lender has no mechanism to demand early repayment if the corporation deteriorates financially — leaving the lender unsecured and without recourse until the original maturity date.
Fix: Include at least three events of default — missed payment, insolvency filing, and material breach — with a reasonable cure period and an explicit right to accelerate the full outstanding balance.
In plain language: Identifies the stockholder lender and the corporate borrower by their full legal names, states the nature of the relationship (percentage of ownership), and records the purpose of the loan.
This Loan Agreement is entered into as of [DATE] between [STOCKHOLDER FULL NAME] ('Lender'), a stockholder holding approximately [X]% of the outstanding shares of [CORPORATION LEGAL NAME], a [STATE] corporation ('Borrower'), for the purpose of [LOAN PURPOSE].
Common mistake: Using a trade name or informal name for either party. If the entity name doesn't match the corporate registry exactly, the agreement may be unenforceable or rejected by auditors and lenders.
In plain language: States the exact principal amount being lent and how and when the funds will be transferred — lump sum, tranches, or on-demand draw.
Lender agrees to lend to Borrower the principal sum of $[AMOUNT] ('Loan'), to be disbursed as a single lump sum on [DATE] by wire transfer to Borrower's account ending in [LAST 4 DIGITS].
Common mistake: Failing to specify the disbursement method and date. An undated or uncorroborated advance is difficult to distinguish from equity or a gift in a subsequent tax audit.
In plain language: Sets the annual interest rate, the accrual method (simple or compound), and the frequency of interest payments — monthly, quarterly, or at maturity.
The outstanding principal shall bear interest at the rate of [X]% per annum, calculated on the basis of a 365-day year, accruing daily and payable [monthly / quarterly / at maturity] commencing [DATE].
Common mistake: Setting the interest rate below the IRS Applicable Federal Rate (AFR) without realizing the IRS will impute interest at the AFR anyway — creating phantom income for the lender and a non-deductible expense for the corporation.
In plain language: Defines when and how the corporation repays the loan — fixed monthly installments, a bullet repayment at maturity, or a custom amortization schedule.
Borrower shall repay the Loan in [X] equal monthly installments of $[AMOUNT] each, commencing on [FIRST PAYMENT DATE], with a final payment of all outstanding principal and accrued interest due on [MATURITY DATE].
Common mistake: Using vague repayment language like 'when funds are available.' This makes the loan look like a capital contribution and gives the corporation no binding obligation to repay on any schedule.
In plain language: States whether the corporation can repay the loan early, and whether a prepayment penalty applies.
Borrower may prepay the Loan in whole or in part at any time without penalty, provided that all accrued interest to the date of prepayment is paid concurrently.
Common mistake: Omitting the prepayment clause entirely. Without it, the corporation may face an implied prepayment restriction, limiting financial flexibility when cash becomes available.
In plain language: Lists the triggers — missed payment, insolvency, dissolution, breach of covenant — that allow the lender to accelerate the full loan balance and pursue legal remedies.
Each of the following constitutes an Event of Default: (a) failure to pay any amount due within [10] days of the due date; (b) Borrower's insolvency, bankruptcy filing, or assignment for the benefit of creditors; (c) material breach of any representation in this Agreement that remains uncured for [30] days after written notice.
Common mistake: No cure period for non-payment defaults. Courts in most jurisdictions expect a reasonable cure window — omitting one can make the acceleration clause unenforceable or invite litigation.
In plain language: Ranks the stockholder's loan behind the corporation's existing or future senior lenders, so the stockholder agrees not to demand repayment while senior debt is outstanding or during a default under senior facilities.
Lender agrees that the Loan and all obligations hereunder are subordinate and junior in right of payment to all Senior Indebtedness of the Borrower. Lender shall not demand or accept any payment on the Loan while a default exists under any Senior Indebtedness.
Common mistake: Omitting the subordination clause when the corporation has a bank credit facility. Most commercial lenders require stockholder loans to be formally subordinated; missing this clause can trigger a covenant violation under the bank agreement.
In plain language: Both parties confirm they have authority to enter the agreement, that it does not violate any other contract, and that the corporation is solvent at the time of execution.
Borrower represents and warrants that: (a) it is duly organized and in good standing under the laws of [STATE]; (b) execution of this Agreement has been duly authorized by its Board of Directors; (c) Borrower is not insolvent as of the date hereof and will not become insolvent as a result of this transaction.
Common mistake: No board authorization representation. Related-party loans between a stockholder and a corporation typically require board approval — an unexecuted board resolution leaves the agreement vulnerable to challenge by minority shareholders or a bankruptcy trustee.
In plain language: Specifies which jurisdiction's law governs the agreement and how disputes are resolved — litigation in a named court, binding arbitration, or mediation first.
This Agreement shall be governed by and construed in accordance with the laws of the State of [STATE], without regard to its conflict of law principles. Any dispute shall be resolved by binding arbitration administered by [AAA / JAMS] in [CITY], except that either party may seek injunctive relief in any court of competent jurisdiction.
Common mistake: Choosing a governing law state with no connection to either party. Some states — Delaware, New York — have well-developed commercial law that lenders prefer, but the choice must be defensible; courts can override a governing-law clause that is purely opportunistic.
In plain language: Confirms that this written document is the full and final agreement between the parties on the subject of the loan, and that any changes must be in writing signed by both parties.
This Agreement constitutes the entire agreement of the parties with respect to the Loan and supersedes all prior agreements, representations, and understandings. No amendment shall be effective unless made in writing and signed by both parties.
Common mistake: No amendment clause at all, leaving open the possibility that informal emails or verbal promises modify the terms — a common source of related-party loan disputes when the stockholder-lender relationship deteriorates.
Enter the stockholder's full legal name (or trust/entity name if lending through a vehicle) and the corporation's exact registered name. Include the stockholder's approximate ownership percentage and the state or jurisdiction of incorporation.
💡 Pull the corporation's exact name from its Secretary of State filing — even a minor variation (Inc. vs. Incorporated) can create ambiguity in enforcement.
Enter the exact principal amount in numbers and words. Specify whether it is a lump-sum transfer or a draw-down facility, and identify the date and account details for the wire or check.
💡 Keep a bank statement or wire confirmation as corroborating evidence — the IRS and CRA look for paper trails that match the agreement date and amount.
Look up the current IRS Applicable Federal Rate (AFR) for the loan term before entering an interest rate. Set the rate at or above the AFR for the applicable term (short-term under 3 years, mid-term 3–9 years, long-term over 9 years).
💡 The AFR is published monthly by the IRS in a Revenue Ruling — check the month of origination, not the month you fill in the template.
Choose between monthly installments, quarterly payments, or a bullet repayment at maturity. Insert the first payment date, payment amount, and maturity date. Attach an amortization table as Exhibit A if using installments.
💡 A fixed maturity date — even if the corporation intends to roll the loan — demonstrates that the obligation is real and enforceable, which is critical for tax characterization.
List at least three events of default: missed payment (with a 5–15 day cure window), insolvency or bankruptcy filing, and material breach of any representation. Add any covenants specific to the corporation's financial condition.
💡 Align cure periods with the corporation's actual cash-cycle — a 5-day cure period is too short for a business that pays bills monthly.
If the corporation has an existing bank credit line or term loan, include the subordination clause and confirm the language is consistent with the bank's intercreditor requirements. Obtain the bank's consent if required under the credit agreement.
💡 Send a draft of the subordination language to the bank's relationship manager before execution — most banks have a standard form they prefer.
Before signing, ensure the corporation's board of directors has passed a resolution approving the loan on the stated terms. Attach a copy of the resolution as Exhibit B.
💡 Minutes of a board meeting or a written consent signed by all directors both work — the key is a signed document predating or contemporaneous with the agreement.
Both the stockholder and an authorized corporate officer must sign the agreement before or on the date of the first disbursement. Store the fully executed original with corporate records.
💡 Use a digital signature platform that timestamps execution — a signed-after-the-fact agreement is a red flag in both tax audits and insolvency proceedings.
A stockholder loan to a corporation is a transaction in which a shareholder lends money to the company they own equity in, with the expectation of repayment with interest. Unlike a capital contribution, it creates a creditor-debtor relationship — the corporation owes the stockholder a legal debt. A written loan agreement is essential to document the terms and establish that the advance is debt rather than equity for tax and accounting purposes.
A written agreement is the primary evidence that distinguishes a stockholder advance from a capital contribution, gift, or disguised dividend. Tax authorities — including the IRS and CRA — scrutinize related-party loans and will reclassify undocumented advances as equity or taxable distributions, triggering back taxes and penalties. A signed agreement with a fixed repayment schedule, market-rate interest, and board authorization demonstrates genuine debt intent.
In the US, the minimum rate is the IRS Applicable Federal Rate (AFR) for the applicable loan term, published monthly in an IRS Revenue Ruling. Charging below the AFR causes the IRS to impute interest at the AFR, creating taxable income for the lender. In Canada, the CRA prescribed rate applies. In the UK and EU, transfer pricing rules require an arm's-length rate between related parties. As a practical matter, setting the rate at the AFR or a modest spread above it is the most defensible approach.
Yes, in most jurisdictions. Related-party transactions — including loans from stockholders — typically require board authorization under corporate law and the corporation's governing documents. A board resolution or written consent approving the specific loan terms should be obtained before execution and attached to the agreement. Minority shareholders can challenge unauthorized related-party loans, and a bankruptcy trustee can void them if proper procedure was not followed.
If the corporation defaults, the events-of-default clause allows the stockholder lender to accelerate the full outstanding balance and pursue collection through litigation or arbitration. If the corporation becomes insolvent, the stockholder's loan claim ranks as unsecured debt — behind secured creditors and often behind trade creditors — unless the loan is secured against corporate assets. In insolvency, a court may recharacterize an underdocumented stockholder loan as equity, eliminating the repayment claim entirely.
Yes, with the right documentation. A convertible note agreement — or a conversion clause added to the loan agreement — allows the outstanding principal and accrued interest to convert into shares at a defined price or valuation cap. This structure is common in startup financing where the stockholder wants repayment optionality but also the ability to participate in an upside round. Standard loan agreements without a conversion clause cannot be converted to equity without a separate amendment.
Subordination is a contractual agreement in which the stockholder lender agrees that their loan ranks behind the corporation's senior creditors — typically a bank or institutional lender. Senior lenders almost always require stockholder loans to be subordinated before extending credit, and most commercial credit agreements prohibit the corporation from repaying subordinated debt while senior debt is outstanding. Including a subordination clause prevents an inadvertent covenant breach and signals to banks that the stockholder understands the capital stack.
The loan itself is not taxable — neither the disbursement nor the repayment of principal creates income. However, interest received by the stockholder lender is taxable income. If the IRS or CRA determines that the advance was not a genuine loan — because it lacks a fixed repayment schedule, market-rate interest, or board authorization — it may reclassify the advance as a taxable dividend or capital contribution, with different tax consequences for both parties. Proper documentation is the primary defense against reclassification.
For straightforward domestic loans between a stockholder and a small closely held corporation, a high-quality template — completed accurately and paired with a board resolution — is generally sufficient. Engage a corporate attorney when the loan amount is material (typically above $100,000), when the corporation has existing senior debt with subordination requirements, when minority shareholders could challenge the transaction, when the parties are in different countries, or when the loan includes a conversion feature. A one-hour legal review typically costs $300–$600 and is worthwhile for any loan that will appear on an audited balance sheet.
A promissory note is a standalone, unconditional written promise to repay a specific sum by a specific date. A loan agreement is more comprehensive — it includes representations, covenants, events of default, subordination, and dispute resolution that a promissory note omits. For a stockholder loan that will appear on an audited balance sheet or be reviewed by a bank, a full loan agreement provides materially stronger legal and tax protection.
A standard business loan agreement is designed for an arm's-length transaction between a corporation and an unrelated lender such as a bank. A stockholder loan agreement adds related-party disclosures, board-authorization requirements, subordination to senior debt, and IRS AFR-compliance language that are specific to the insider lending context. Using a generic loan agreement for a stockholder transaction omits these critical safeguards.
A convertible note is a loan designed to convert into equity at a future financing event, typically at a discount or valuation cap. A stockholder loan agreement is structured for repayment in cash with no equity conversion. Use a convertible note when the stockholder wants the option to receive shares instead of repayment; use this loan agreement when repayment in cash on a fixed schedule is the intent.
A capital contribution permanently increases the corporation's equity — no repayment obligation, no interest, no creditor rights. A stockholder loan creates a debt obligation with defined repayment terms and interest. The choice has significant tax and balance-sheet implications: debt preserves the stockholder's ability to recover funds without a dividend distribution, but must be properly documented to withstand reclassification as equity.
Founder bridge loans between funding rounds, often structured with a conversion option and subordinated to venture debt or a bank line; AFR compliance critical for US-domiciled founders.
Majority-shareholder loans to property-holding corporations to fund acquisitions or renovations, with specific attention to thin-capitalization rules that can limit interest deductibility.
Working-capital advances from owner-operators to fund raw material purchases, requiring subordination to revolving credit facilities and careful alignment with bank covenant packages.
Partner or principal shareholder loans to fund firm expansion or equipment, often structured as demand loans with interest at the applicable federal or prescribed rate to minimize tax friction.
The IRS requires related-party loans to charge at least the Applicable Federal Rate (AFR) published monthly under IRC §1274(d); below-AFR loans trigger imputed interest under §7872. State corporate law — particularly Delaware and California — requires board approval for related-party transactions. Thin-capitalization is not codified as a bright-line rule in the US, but excessive debt-to-equity ratios invite IRS recharacterization of interest as dividends under the economic substance doctrine.
The CRA requires shareholder loans to be repaid within one year after the corporation's fiscal year-end in which the loan was made, or the full amount is included in the shareholder's income under ITA §15(2). Interest must equal at least the CRA prescribed rate to avoid a taxable benefit. Thin-capitalization rules under ITA §18(4) disallow interest deductions when a non-resident controlling shareholder's debt-to-equity ratio exceeds 1.5:1. Quebec-based corporations must ensure French-language compliance for contracts signed with Quebec counterparties.
Loans from participators (shareholders) to close companies are governed by CTA 2010 ss.455–464; if not repaid within nine months of the accounting period end, a 33.75% s.455 tax charge applies to the corporation. Transfer pricing rules under TIOPA 2010 require arm's-length interest rates for related-party loans exceeding £10 million. Companies House disclosure requirements apply to director-shareholder loans above £10,000 in annual accounts. Board approval and minutes are required under the Companies Act 2006 for transactions between a company and a substantial shareholder.
EU member states apply varying thin-capitalization and interest-limitation rules under the Anti-Tax Avoidance Directive (ATAD); most cap net interest deductions at 30% of EBITDA. Transfer pricing documentation is required for related-party transactions above country-specific thresholds, typically €1–5 million. GDPR requirements apply to the processing of personal data of individual stockholder lenders in cross-border agreements. France, Germany, and the Netherlands have domestic rules imposing minimum interest rates on shareholder loans that may be stricter than the OECD arm's-length standard.
| Path | Best for | Cost | Time |
|---|---|---|---|
| Use the template | Closely held corporations with a single majority stockholder making a straightforward domestic cash loan below $100,000 | Free | 30–60 minutes |
| Template + legal review | Loans above $100,000, corporations with existing bank debt requiring subordination consent, or multiple stockholders with potential for minority-shareholder challenge | $300–$750 (one-hour attorney review and board resolution drafting) | 1–3 days |
| Custom drafted | Cross-border related-party loans, convertible or secured structures, publicly reporting companies, or loans subject to transfer pricing scrutiny in multiple jurisdictions | $1,500–$5,000+ | 1–2 weeks |
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