Because a corporation is an entirely different person in law, it is possible for the shareholders or others to lend it money.
If the structure of your business is a sole proprietorship or a partnership, it is impossible to lend yourself money. If you start doing deals with yourself, like lending yourself money, you are looking to get locked up.
Loans to the corporation may come from two sources:
- Outsiders – These are people who do not have a share in the corporation. For example banks, parents who are assisting
children, friends, relatives, and other sources.
- Insiders – If a shareholder lends the corporation money, then when the money is repaid to the shareholder, only the interest is taxed, not the full amount of the loan that is repaid.
Smart shareholders make most of their contribution to the financing of the corporation by way of loans and as little as possible by purchasing shares. Remember that the price paid by shareholders for shares is not returned to the shareholder, unless the shareholder sells the shares. On the other hand, loans to the corporation can be repaid when the corporation makes profit and the repayment is not a taxable dividend but merely a repayment of the loan.
The Internal Revenue service allows loans within reason by shareholders. There are no firm regulations regarding the ratio between the amount used for purchasing shares and the amount of money that can be loaned to the corporation.
Also, many states require that the corporations must have sufficient share capital for its general needs.
In some jurisdictions in the world, you can pay $1.00 for your share and loan the corporation $99,999.00.
In California, you must capitalize the company with the amount it needs to operate, and then you can loan additional money to the corporation.
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