# Loaning money to a corporation as an investment



## Nugpot (Mar 16, 2015)

Hi,

I've heard of some people becoming a partner in a incorporation by loaning money to the corporation. They not only have a stake in the company but also get interest paid out by the corporation.

Is this legal? If so for how long can this setup go on without legal implications?
Seems like a good deal... What are the pros and cons?

Appreciate your feedback/opinions...

Thanks
Jay


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## Just a Guy (Mar 27, 2012)

I think you're tLking about shareholder's loans. It's completely legal and usually how many companies start. Their founders put money into the corporation which earns interest while they try and get the company to make a profit...

Of course, if the company never makes any money, you could lose your entire investment plus potentially be on the hook for other debts if you didn't structure the company properly...


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## Russ (Mar 15, 2010)

I'm wondering if Jay was referring to a person who is not a shareholder lending money to a corporation. If so, the person does not get ownership in the corporation by virtue of lending money.

Either way the question was intended, the interest is taxable in the hands of the lender, shareholder or not. And presumably the corporation would have to earn income in order to repay the loan and interest, and this corporate income is taxable for the corporation.

I don't see it as a particularly "good deal" unless the interest rate is high relative to the risk of default.


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## Rusty O'Toole (Feb 1, 2012)

AKA "buying corporate bonds and preferred stock". If you are thinking of doing this, look into the return you can get by buying the securities of large, well established companies before you invest in a smaller, riskier enterprise.


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## Nugpot (Mar 16, 2015)

Thanks everyone.

I was referring to shareholders loan. 
Is there a time limit on which the corporation has to pay the principle or can this go on as long as the company is making a decent profit.
When the principle is eventually paid out, is that considered an expense to the corporation

Regards
Jay


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## Just a Guy (Mar 27, 2012)

A loan is a loan, same as if you borrowed money from a bank. The difference with a shareholder's loan is, because the money is owed to the owners, the "loaner" is generally more forgiving of the terms for repayment and more willing to wait, unlike a bank who wants their money when they want it.

As an owner, the cost of anything you buy for the corporation can usually be considered a shareholder's loan on paper until it's paid back by the company. If you don't keep the reciept, or get repaid, you've just made a free donation to the company.

Happens all the time. One of the reasons why owners usually lose everything when the company goes under, they've been pumping in money (shareholder's loans) to keep it going when, in reality, the economy says there is no need for the company.


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