SHAREHOLDER LOAN AGREEMENT

(Related-Party Loan - Corporation/LLC and Shareholder/Member)

Loan Amount: $[PRINCIPAL AMOUNT]
Effective Date: [DATE]
Loan Number: [UNIQUE IDENTIFIER]

TAX NOTICE

This loan between related parties must comply with IRS requirements to be treated as bona fide debt rather than equity or a distribution. Key requirements include: (1) unconditional obligation to repay, (2) reasonable interest rate (at least the Applicable Federal Rate), (3) fixed maturity date, (4) documentation, and (5) actual repayment. Consult a tax advisor.

[// GUIDANCE: Shareholder loans (loans between a corporation/LLC and its shareholders/members) receive heightened IRS scrutiny. If a loan lacks the characteristics of bona fide debt, the IRS may recharacterize it as:
- Equity contribution (if shareholder lends to company)
- Deemed dividend/distribution (if company lends to shareholder)
- Capital gain instead of interest income

To support debt treatment:
1. Document the loan formally (this agreement)
2. Use an arm's length interest rate (at least the AFR)
3. Set a fixed maturity date
4. Make actual payments on schedule
5. Have a written promissory note
6. Obtain proper corporate authorization]

TABLE OF CONTENTS

ARTICLE I: PARTIES AND BACKGROUND
ARTICLE II: LOAN TERMS
ARTICLE III: INTEREST
ARTICLE IV: REPAYMENT
ARTICLE V: SECURITY
ARTICLE VI: REPRESENTATIONS AND WARRANTIES
ARTICLE VII: COVENANTS
ARTICLE VIII: DEFAULT AND REMEDIES
ARTICLE IX: TAX MATTERS
ARTICLE X: DISPUTE RESOLUTION
ARTICLE XI: GENERAL PROVISIONS
ARTICLE XII: SIGNATURES

ARTICLE I: PARTIES AND BACKGROUND

1.1 Parties

This Shareholder Loan Agreement ("Agreement") is entered into as of [EFFECTIVE DATE] by and between:

Select Loan Direction:

☐ LOAN FROM SHAREHOLDER TO COMPANY (Shareholder is Lender)

☐ LOAN FROM COMPANY TO SHAREHOLDER (Company is Lender)

COMPANY:

SHAREHOLDER/MEMBER:

1.2 Recitals

WHEREAS:

A. [SHAREHOLDER/COMPANY] desires to lend funds to [COMPANY/SHAREHOLDER] for the purposes described herein;

B. [COMPANY/SHAREHOLDER] desires to borrow such funds on the terms set forth herein;

C. The parties intend that this transaction constitute bona fide indebtedness for federal income tax purposes;

D. The [Board of Directors/Managers/Members] of Company has approved this loan as a related-party transaction in accordance with applicable corporate governance requirements.

NOW, THEREFORE, in consideration of the mutual covenants herein, the parties agree as follows:

ARTICLE II: LOAN TERMS

2.1 Loan Amount

The Lender agrees to lend to Borrower, and Borrower agrees to borrow from Lender, the principal sum of:

[DOLLAR AMOUNT WRITTEN OUT] DOLLARS ($[NUMERICAL AMOUNT])

(the "Principal Amount" or "Loan")

2.2 Purpose

The Loan proceeds shall be used for:

☐ Working capital for Company operations
☐ Capital expenditures: [DESCRIBE]
☐ Personal purposes of Shareholder: [DESCRIBE]
☐ Investment by Shareholder in Company
☐ Distribution in lieu of dividend (if loan to shareholder)
☐ Other: [DESCRIBE]

2.3 Disbursement

The Loan shall be disbursed as follows:

☐ Single Disbursement: The entire Principal Amount shall be disbursed on or about [DATE].

☐ Multiple Disbursements: Disbursements shall be made as follows:
- $[AMOUNT] on [DATE]
- $[AMOUNT] on [DATE]
- [Additional disbursements as needed]

☐ As Needed: Disbursements up to the Principal Amount shall be made upon Borrower's written request.

Disbursement Method: ☐ Wire transfer ☐ Check ☐ ACH ☐ Other: [METHOD]

2.4 Maturity Date

The entire unpaid Principal Amount plus all accrued interest shall be due and payable in full on [MATURITY DATE] (the "Maturity Date").

[// GUIDANCE: For tax purposes, a definite maturity date is important. The IRS is more likely to recharacterize a loan as equity if it has no fixed repayment date.]

2.5 Promissory Note

This Agreement shall be evidenced by a Promissory Note in the form attached as Exhibit A, executed by Borrower in favor of Lender.

ARTICLE III: INTEREST

3.1 Interest Rate

Interest shall accrue on the outstanding Principal Amount at the rate of [PERCENTAGE]% per annum.

[// GUIDANCE: APPLICABLE FEDERAL RATE (AFR) REQUIREMENT

Under IRC § 7872, loans between related parties must bear interest at no less than the Applicable Federal Rate (AFR) published monthly by the IRS. If interest is below the AFR:
- The IRS may impute interest at the AFR
- For shareholder loans to company: Foregone interest may be treated as a capital contribution followed by a distribution of the imputed interest
- For company loans to shareholder: Foregone interest may be treated as compensation (if shareholder is employee) or dividend

Current AFR rates (as of Issue Date - VERIFY BEFORE EXECUTION):
- Short-term (up to 3 years): [CURRENT RATE]%
- Mid-term (3-9 years): [CURRENT RATE]%
- Long-term (over 9 years): [CURRENT RATE]%

The interest rate in this Agreement should be at least the applicable AFR for the loan term.]

3.2 Interest Computation

Interest shall be computed on the basis of:
☐ A 365-day year based on actual days elapsed
☐ A 360-day year based on actual days elapsed

3.3 Interest Payment

Interest shall be paid:

☐ Monthly: On the [DAY] of each month, beginning [DATE].

☐ Quarterly: On [DATES], beginning [DATE].

☐ Annually: On [DATE] of each year.

☐ At Maturity: All interest due with Principal on the Maturity Date.

☐ Other: [SPECIFY]

[// GUIDANCE: Regular interest payments support debt treatment for tax purposes. If interest is allowed to accrue without payment, document that it is accruing and periodically confirm the obligation.]

3.4 Default Interest

Upon an Event of Default, interest shall accrue at [PERCENTAGE]% per annum on all outstanding amounts.

3.5 Usury Savings

Interest shall not exceed the maximum rate permitted by applicable law. Any excess interest shall be applied to principal or refunded.

ARTICLE IV: REPAYMENT

4.1 Repayment Schedule

Select One:

☐ Single Payment at Maturity: The entire Principal Amount plus all accrued interest shall be due on the Maturity Date.

☐ Amortizing Payments: Borrower shall make [NUMBER] consecutive [MONTHLY/QUARTERLY/ANNUAL] payments of $[AMOUNT] (principal and interest), commencing on [DATE], with any remaining balance due on the Maturity Date.

☐ Interest-Only with Principal at Maturity: Borrower shall make periodic interest payments as set forth in Section 3.3, with the entire Principal Amount due on the Maturity Date.

☐ Demand: Principal and interest due upon demand by Lender, but in any event no later than [DATE].

4.2 Application of Payments

Payments shall be applied first to accrued interest, then to principal, unless otherwise specified.

4.3 Prepayment

☐ Prepayment Permitted: Borrower may prepay all or any portion of the Principal at any time without penalty.

☐ Prepayment Premium: Prepayment before [DATE] requires a premium of [PERCENTAGE]% of the amount prepaid.

☐ Prepayment Requires Consent: Borrower may not prepay without Lender's prior written consent.

4.4 Mandatory Prepayment

☐ Not Applicable

☐ Applicable: Borrower shall prepay the Loan upon occurrence of:
- Sale of substantially all assets
- Change of control
- Receipt of proceeds from [SPECIFY]
- Other: [SPECIFY]

ARTICLE V: SECURITY

5.1 Security Status

☐ UNSECURED: This Loan is unsecured.

☐ SECURED: This Loan is secured by the following Collateral:

Collateral Description:
[DESCRIBE COLLATERAL]

Security Documents:
☐ Security Agreement dated [DATE]
☐ UCC-1 Financing Statement
☐ Pledge Agreement (for shares/membership interests)
☐ Other: [DESCRIBE]

5.2 Subordination

☐ Not Subordinated: This Loan is not subordinated to any other indebtedness.

☐ Subordinated: This Loan is subordinated to [DESCRIBE SENIOR DEBT]. The terms of subordination are set forth in the Subordination Agreement dated [DATE].

[// GUIDANCE: Subordination to third-party debt is common for shareholder loans. This may be required by a bank or other institutional lender.]

ARTICLE VI: REPRESENTATIONS AND WARRANTIES

6.1 Borrower Representations

Borrower represents and warrants:

(a) Authority: Borrower has full power and authority to enter into this Agreement and perform its obligations.

(b) Enforceability: This Agreement is a valid and binding obligation of Borrower.

(c) No Conflicts: This Agreement does not violate any law, agreement, or organizational document.

(d) Solvency: Borrower is solvent and will not be rendered insolvent by this Loan.

(e) Arm's Length Terms: The terms of this Loan are comparable to terms that would be obtained in an arm's length transaction with an unrelated party.

6.2 Lender Representations

Lender represents and warrants:

(a) Authority: Lender has full power and authority to enter into this Agreement.

(b) Source of Funds: The funds being lent are lawfully obtained and are not subject to any restrictions that would prevent this Loan.

(c) Arm's Length Terms: The terms of this Loan are comparable to terms that would be obtained in an arm's length transaction with an unrelated party.

6.3 Mutual Representations

Both parties represent:

(a) This transaction is intended to create bona fide indebtedness for federal income tax purposes.

(b) The parties will treat this Loan as debt (not equity) for all tax purposes.

(c) The parties have independently determined that the interest rate is reasonable and at arm's length.

ARTICLE VII: COVENANTS

7.1 Borrower Covenants

Borrower covenants:

(a) Payments: Make all payments when due.

(b) Records: Maintain accurate records of the Loan.

(c) Notice: Promptly notify Lender of any Event of Default or material change in financial condition.

(d) Collateral (if secured): Maintain and preserve Collateral.

(e) Tax Treatment: Treat this Loan as debt for all tax purposes and report interest accordingly.

7.2 Lender Covenants

Lender covenants:

(a) Tax Treatment: Treat this Loan as debt for all tax purposes and report interest accordingly.

(b) Issue Form 1099-INT: If required, issue Form 1099-INT to Borrower for interest paid.

ARTICLE VIII: DEFAULT AND REMEDIES

8.1 Events of Default

Each of the following constitutes an "Event of Default":

(a) Payment Default: Failure to pay principal or interest when due, continuing for [NUMBER] days after due date;

(b) Representation Default: Any representation proves materially false;

(c) Covenant Default: Failure to perform any covenant, continuing for [NUMBER] days after notice;

(d) Insolvency: Bankruptcy, insolvency, or assignment for benefit of creditors by Borrower;

(e) Death/Incapacity (if Borrower is individual): Death or legal incapacity of Borrower;

(f) Material Adverse Change: Material adverse change in Borrower's financial condition;

(g) Collateral Impairment (if secured): Material loss or impairment of Collateral.

8.2 Remedies

Upon an Event of Default, Lender may:

(a) Declare all amounts immediately due and payable;

(b) Apply the Default Rate;

(c) Exercise all rights under security documents (if secured);

(d) Pursue any other remedies available at law or in equity.

8.3 Waiver

No delay in exercising any remedy constitutes a waiver.

ARTICLE IX: TAX MATTERS

9.1 Intent

The parties intend that this Loan constitute bona fide indebtedness for federal, state, and local income tax purposes and not equity, a capital contribution, a dividend, distribution, or compensation.

9.2 Debt Treatment

Each party shall:

(a) Report this Loan as debt on all tax returns;

(b) Report interest payments as interest income (Lender) and interest expense (Borrower);

(c) Issue and file appropriate tax information returns (e.g., Form 1099-INT);

(d) Not take any position inconsistent with debt treatment unless required by law.

9.3 Below-Market Rate Consequences

If the IRS determines that the Interest Rate is below the Applicable Federal Rate:

(a) The parties acknowledge that imputed interest rules under IRC § 7872 may apply;

(b) Each party shall bear its own tax consequences of any such determination;

(c) This Agreement shall not be amended to change the stated interest rate retroactively.

9.4 Tax Reporting

Interest Payments: Interest paid shall be reported as follows:

9.5 Withholding

If any withholding is required on interest payments, Borrower shall withhold and remit such amounts to the appropriate tax authority.

ARTICLE X: DISPUTE RESOLUTION

10.1 Governing Law

This Agreement shall be governed by the laws of the State of [GOVERNING LAW STATE].

10.2 Forum Selection

Any action shall be brought in the courts of [COUNTY], [STATE].

10.3 Waiver of Jury Trial

☐ JURY TRIAL WAIVER: Each party waives any right to trial by jury.

☐ No Jury Waiver: The parties retain their jury trial rights.

10.4 Mediation

☐ Before any litigation, the parties shall attempt to resolve disputes through mediation in [LOCATION].

ARTICLE XI: GENERAL PROVISIONS

11.1 Notices

All notices shall be in writing and delivered to the addresses in Article I.

11.2 Amendments

This Agreement may be amended only by written instrument signed by both parties.

11.3 Assignment

Neither party may assign without the other's written consent.

11.4 Severability

Invalid provisions shall be modified; the remainder continues in force.

11.5 Entire Agreement

This Agreement constitutes the entire agreement regarding the Loan.

11.6 Waiver

No waiver shall be effective unless in writing.

11.7 Counterparts; Electronic Signatures

May be executed in counterparts. Electronic signatures are valid under E-SIGN Act.

11.8 Corporate Authorization

Company certifies: This Agreement has been duly authorized by the [Board of Directors/Managers/Members] pursuant to resolutions dated [DATE]. A copy of such resolutions is attached as Exhibit B.

ARTICLE XII: SIGNATURES

IN WITNESS WHEREOF, the parties have executed this Shareholder Loan Agreement as of the Effective Date.

COMPANY:

[COMPANY NAME]

By: _________________________________

Name: [NAME]

Title: [TITLE]

Date: ___________

SHAREHOLDER/MEMBER:

If Individual:

Signature: _________________________________

Printed Name: [NAME]

Date: ___________

If Entity:

[ENTITY NAME]

By: _________________________________

Name: [NAME]

Title: [TITLE]

Date: ___________

EXHIBITS

• Exhibit A: Promissory Note
• Exhibit B: Board/Member Resolutions
• Exhibit C: Security Agreement (if applicable)
• Exhibit D: Subordination Agreement (if applicable)

COMPLIANCE CHECKLIST

☐ Interest rate at or above Applicable Federal Rate (AFR)
☐ Fixed maturity date established
☐ Written promissory note executed
☐ Corporate/LLC authorization obtained (resolutions)
☐ Related-party transaction disclosed and approved
☐ Payment schedule documented
☐ Actual payments made as scheduled (maintain records)
☐ Interest income/expense properly reported on tax returns
☐ Form 1099-INT issued if required
☐ Legal counsel review completed
☐ Tax advisor review completed

TAX DOCUMENTATION CHECKLIST

To support debt treatment, maintain:

☐ Executed Loan Agreement and Promissory Note
☐ Evidence of actual disbursement of funds
☐ Board/member resolutions authorizing the loan
☐ Records of all payments made
☐ Bank statements showing payments
☐ Form 1099-INT (if applicable)
☐ Tax returns showing interest income/expense
☐ Correspondence regarding the loan
☐ Any modifications in writing

LEGAL CITATIONS REFERENCE

Tax Law

• IRC § 385: Treatment of certain interests in corporations as stock or indebtedness
• IRC § 7872: Treatment of loans with below-market interest rates
• Treas. Reg. § 1.385-1 et seq.: Debt vs. equity regulations
• Rev. Rul. 85-119: Shareholder loan characterization factors

Applicable Federal Rates

• Published monthly by IRS in Revenue Rulings
• Short-term: Loans up to 3 years
• Mid-term: Loans 3-9 years
• Long-term: Loans over 9 years

State Law

• Corporate/LLC fiduciary duty rules for related-party transactions
• State usury laws (may apply)

Prepared for professional use. Shareholder loans have significant tax implications. Consult tax and legal advisors before execution.