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Shareholder Loans are Loans
sinclair | February 17, 2022
Owner Managers are often required to advance personal funds to their business when available capital, including bank financing, retained earnings and shareholders’ equity, is not sufficient to meet working capital demands. The advances can be in various forms including direct transfers, reduced pay, or charging business expenses to a personal credit card, and are often done urgently and as a practical matter – the business needs cash.
It is typical for Owner Managers to simultaneously fill many roles in a corporation, all with unique rights and obligations. Examples include: Common Shareholder (majority or minority), Preferred Shareholder, Officer, Director, Employee and, when shareholder advances are made, Lender.
But, with the day to day pressures of running a business, the different rights and obligations of each role are often ignored. As an Employee, the Owner Manager is paid last; as a Director, the Owner Manager is not compensated at all; as a Lender, the loans are not documented, not secured and repayments are not scheduled.
In this Episode of the Winning Momentum Podcast we discuss the power of debt and the related importance of treating shareholder loans as loans.