Shareholder loan to a company

[Michael14]

Hello,

Me and my friend are 50-50 shareholders in a company. I am a Director. He cannot be a Director because he is still employed at a big (global company) and his contract states that he cannot take a role in another company (he can be a shareholder though).

We need to give a loan to a company in order to start a business (company bank account has no funds as we just started it).

I am aware that I can give a Director's loan, and I know all the rules about it.

However, how can my business partner, who is 50% shareholder but not a Director give a loan to the company? Is there a regulation/rule (like a Director's loan is) that regulates this?

Loan would be interest free for both of us if this is important to mention.

Thanks!

 

[Porky]

I’m not fully understanding the issue here

The other guy can lend the limited company a loan and for your company records can draw up a simple loan agreement confirming the terms of that loan.

Same would apply to any other shareholder or anyone else that wants to lend cash to the business

He is not a director hence, it can’t be a “Director loan” in your accounts it’s “Other loans” but nothing to stop you having a loan agreement setting out similar terms, ie interest free paid back in 100 years or what ever other terms you mutually agree to mirror each other’s position.

Good luck

 

[DWS]

As far as I am aware there are no restrictions to anyone offering a loan to either a Company or person, but first port of call for the question should be the Company Accountant.

 

[Lisa Thomas]

Suggest the shareholder gets a debenture in place BEFORE advancing any funds, so that they have some security over the loan.

 

[Ozzy]

Popped here to answer very similar to @Porky so suggest go with their advice.
I probably would not go down the debenture route if I'm honest, but instead, have the loan(s) and the repayment terms included as part of the Shareholders Agreement.

You are getting a Shareholder Agreement, aren't you?

What I don't know, and an accountant would need to give input to this, is whether a loan exceeding 12 months as interest-free has a tax benefit implication. I have a bell ringing in my head there may be something here but I'm not qualified to answer this bit.

 

[Elliot Green]

If the Board of Directors are prepared to accept a loan from more or less anyone, generous enough to provide credit interest-free then it is difficult to see how anyone could object to that.

 

[Ivel]

It's not an issue at all; just draft some simple agreement between the partner and the company. It will not be called a Director's loan but something else. As far as I am aware, anyone can give a loan to a company, and it does not matter if that is the director, shareholder, or not related to the business at all. That will be a liability in the company accounts until it is repaid.

 

[Lisa Thomas]

Popped here to answer very similar to @Porky so suggest go with their advice.
I probably would not go down the debenture route if I'm honest, but instead, have the loan(s) and the repayment terms included as part of the Shareholders Agreement.

You are getting a Shareholder Agreement, aren't you?

What I don't know, and an accountant would need to give input to this, is whether a loan exceeding 12 months as interest-free has a tax benefit implication. I have a bell ringing in my head there may be something here but I'm not qualified to answer this bit.

Out of interest Ozzy, can I ask why you recommend this is processed as an unsecured loan rather than a secured one?

Thanks

 

[DontAsk]

He cannot be a Director because he is still employed at a big (global company) and his contract states that he cannot take a role in another company (he can be a shareholder though).

Are you a competitor to his employer?

Is this a blanket no other employment, or a no directorships?

I would seriously get some advice as to whether this is actually enforceable.

 

[Ozzy]

Out of interest Ozzy, can I ask why you recommend this is processed as an unsecured loan rather than a secured one?

If you're business partners going into business together then you take the risk together, you put your money in the business together and risk losing it together. It's a moral/ethical view I have rather than a legal one, a 'we're in this together' opinion. One business partner shouldn't have a debenture over their loan above the other not having one, just my 'emotional' opinion on it.

 

[Lisa Thomas]

I see but here it sounds as if only one is putting in funds, it's not an equal investment...

 

[Ozzy]

I see but here it sounds as if only one is putting in funds, it's not an equal investment...

If it was only one investor then yes I may be inclined to consider a debenture, perhaps, depending on the circumstances. However, I interpreted from the following statement that they were both putting in a loan.

I am aware that I can give a Director's loan, and I know all the rules about it.

However, how can my business partner, who is 50% shareholder but not a Director give a loan to the company?

 

[Lisa Thomas]

Ah, I see. Makes sense.