Your Checklist for Loans between You and Your Entity

On just about every set of books I see for an entity, regardless of the type of entity or the type of business, there is a loan to or from the entity's owner.

During the early years of an entity, it's common to see loans from the owner to the entity - usually to fund start up expenses and initial operating expenses.

During the later years, it's common to see loans from the entity to the owner as there tends to be more cash available in an entity as it matures.

Unfortunately, these loans are rarely done correctly, which can result in some nasty tax consequences if challenged by the tax authorities.

Here's a checklist you can use to make sure the loans between you and your entity are on track:

#1 Have a Signed Loan Agreement

Have a signed loan agreement that supports how the loan, payments and interest will work. The document should be signed by you and your entity. This means you may have to sign the agreement twice - once for yourself and again for your entity.

#2 Record the Loan in Your Entity's Minutes

Your entity should approve the loan and the loan terms in its minutes. In doing so, the entity should consider the pros and cons of the loan and document why the loan makes business sense.

#3 Record the Loan on Your Entity's Balance Sheet

If your entity has a loan agreement that indicates $50,000 was loaned to the owner, that $50,000 should be reflected on the entity's balance sheet. The loan amount on the balance sheet should be adjusted any time a payment is made that includes principal.

#4 Make Payments Timely

Keep records of all payments made and note the portion that is principal and the portion that is interest. If there comes a point in time when it is not possible to make payments timely, then amend your loan agreement so payments can be made timely.

#5 Charge a Reasonable Interest Rate

All of the above items don't mean much if the interest rate charged is not reasonable. Whether it's the owner or the entity making the loan, each party should document their research and findings as to why the interest rate being charged is reasonable.

Get Your Loans on Track

When loans are made between unrelated parties, the above items are often studied in great detail and the agreement is not entered into lightly. However, when related parties are involved, these important details are often addressed in a very informal manner (and sometimes not at all) which can lead to trouble.

If you currently have a loan between you and your entity that doesn't have these details in place, now is the time to get that loan on track and keep it on track.


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On just about every set of books I see for an entity, regardless of the type of entity or the type of business, there is a loan to or from the entity's owner.

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