Shareholder Loan Agreement Template

In plain language: Identifies the lender and borrower by legal name, states whether the loan flows from shareholder to company or company to shareholder, and records the shareholder's ownership percentage at the time of the agreement.

Common mistake: Using a shareholder's informal name or trade name instead of their registered legal name — creating an enforceability gap if the loan is later disputed or the company is wound up.

In plain language: States the exact amount being lent, the currency, and the date or conditions on which funds will be transferred — confirming the loan has actually been made and is not merely a commitment.

Common mistake: Dating the agreement before funds have actually transferred, then never recording the actual disbursement date — leaving the loan's existence unsubstantiated for tax or audit purposes.

In plain language: Sets the annual interest rate — fixed or variable — the method of calculation (simple or compound), and the accrual start date. The rate must meet or exceed the applicable arm's-length minimum to avoid imputed interest.

Common mistake: Setting a 0% or nominal interest rate without checking the jurisdiction's minimum prescribed rate — tax authorities in the US, Canada, and the UK will impute interest income at the statutory rate regardless of what the agreement says.

In plain language: Defines whether repayment is in fixed instalments, a lump sum at maturity, or on demand, and states the final repayment date. Demand loans carry higher tax-compliance risk in some jurisdictions.

Common mistake: Choosing a demand structure because it seems simpler, without recognizing that demand loans are treated as short-term debt under thin-capitalization rules and may accelerate deemed-dividend exposure in Canada.

In plain language: States whether the borrower may repay all or part of the loan early without penalty, and whether the lender may demand early repayment in specified circumstances.

Common mistake: Omitting a prepayment clause entirely — leaving it ambiguous whether the borrower must pay a break fee or whether the lender can recall the loan without cause, creating disputes when the company's cash position improves.

In plain language: Confirms that the shareholder's right to repayment ranks behind all senior secured and unsecured creditors, and that the shareholder will execute any subordination or standstill agreement required by a senior lender.

Common mistake: Failing to include a subordination clause, causing a bank or institutional lender to refuse to advance funds because the shareholder loan sits at the same priority level as the senior facility.

In plain language: Each party confirms it has authority to enter the agreement, that the loan does not breach any other agreement, and that the company will maintain its corporate existence and not take actions that impair repayment while the loan is outstanding.

Common mistake: No covenant restricting dividends while the loan is outstanding — allowing the company to distribute cash to other shareholders while the lender-shareholder's principal sits unpaid.

In plain language: Lists specific triggers — missed payment, insolvency filing, breach of covenant, change of control — that allow the lender to accelerate the full balance and pursue remedies.

Common mistake: A change-of-control provision that automatically triggers default on an acquisition — inadvertently blocking an otherwise clean M&A transaction and requiring a waiver under time pressure.

In plain language: Addresses how interest payments are characterized for tax purposes, whether withholding tax applies on cross-border payments, and which party bears the cost of any withholding.

Common mistake: No gross-up clause on cross-border loans — meaning the lender-shareholder receives less than the agreed interest after withholding, effectively lowering their return below the arm's-length rate.

In plain language: Specifies which jurisdiction's law governs the agreement and how disputes will be resolved — litigation, arbitration, or mediation — and the venue.

Common mistake: Choosing a governing law that differs from where the company is incorporated and where the shareholder resides, creating a situation where no single court has convenient jurisdiction and enforcement becomes expensive.

A shareholder loan agreement is a written contract that documents a loan between a company and one of its shareholders — either the shareholder lending money to the company or the company advancing funds to the shareholder. It records the principal, interest rate, repayment terms, and subordination provisions, and provides the documentary evidence that tax authorities and auditors require to treat the transaction as genuine debt rather than disguised equity or a taxable distribution.

No statute in most jurisdictions compels a written shareholder loan agreement, but operating without one creates serious practical and tax risk. Tax authorities in the US, Canada, the UK, and the EU routinely reclassify undocumented shareholder advances as deemed dividends or capital contributions, triggering tax at distribution rates instead of interest rates. A written agreement with arm's-length terms is the primary defense against that reclassification.

The rate must be at least equal to the applicable arm's-length minimum in the relevant jurisdiction — the IRS Applicable Federal Rate in the US, the CRA prescribed rate in Canada (updated quarterly), or HMRC's official rate in the UK. Setting a rate below the statutory floor causes the tax authority to impute interest income to the lender at the statutory rate regardless of what the agreement says. For cross-border loans, check both the borrower's and lender's jurisdictions and use the higher floor.

Legally, parties may agree to a zero-interest loan, but tax authorities will not respect that arrangement. In the US, the IRS imputes interest at the Applicable Federal Rate on loans above the de minimis threshold. In Canada, CRA imputes a shareholder benefit equal to the prescribed rate on any below-market or interest-free loan to a shareholder. In the UK, HMRC treats the notional interest as a benefit in kind. In all cases, a rate at or above the statutory minimum is the only way to avoid imputed income or benefit charges.

Thin capitalization rules restrict the amount of related-party debt a company can carry before interest deductions are denied. In Canada, the 1.5:1 debt-to-equity ratio under the Income Tax Act applies to non-resident shareholders. The OECD's BEPS framework has led many EU member states and the UK to adopt similar fixed-ratio rules. If the shareholder loan pushes the company past the applicable debt-to-equity ceiling, a portion of the interest expense will be non-deductible, increasing the company's taxable income.

Share capital is permanent equity — the shareholder receives an ownership interest and is repaid only on liquidation or a buyback. A shareholder loan is debt — the shareholder is a creditor with a contractual right to repayment of principal and interest on agreed terms, regardless of the company's profitability. The distinction matters for tax (interest is generally deductible; dividends are not), for priority in insolvency (creditors rank above equity), and for financial reporting.

Most institutional lenders require subordination as a condition of providing financing to the company. Without a subordination clause, the shareholder loan sits at the same creditor priority as the bank facility, which institutional lenders treat as a structural risk. Including a subordination clause in the shareholder loan agreement — and agreeing to execute any intercreditor or standstill agreement the bank requires — removes this obstacle and is standard practice for any company with outside financing.

The consequences depend on the loan's direction. If the company has not repaid the shareholder, the shareholder-lender can enforce the agreement as a creditor, including commencing proceedings. However, in insolvency, shareholder loans are typically subordinated to all other creditors and recover little. If the company has lent money to a shareholder and it is not repaid, tax authorities may treat the outstanding amount as a taxable dividend in the year the loan was made, or in a subsequent year if it remains unrepaid past a statutory grace period.

For a straightforward domestic loan with a clear interest rate and repayment schedule, a professionally drafted template is often sufficient for small and medium-sized businesses. Engage a lawyer when the loan is cross-border, when transfer pricing or thin-capitalization rules are relevant, when the loan forms part of a leveraged buyout capital stack, or when a senior lender requires a specific form of subordination agreement. A 1–2 hour legal review typically costs $400–$800 and is worthwhile for any loan above $100,000.