Shareholder loans: how to record them

A shareholder loan often starts without anyone calling it one: an owner puts $25,000 of personal savings into the business account to cover a slow quarter. Six months later the same owner pays for a family vacation with the company debit card. In many of the small corporations we review, the first shows up as sales and the second as travel expense. Both belong on the balance sheet, and both are shareholder loans if everyone treats them that way.

This post covers both directions, the entries for each, how to set the accounts up in QuickBooks Online, and the year-end question that decides whether a balance is still a loan at all. It applies to corporations, C or S. In a sole proprietorship, or a single-member LLC taxed as one, owner money runs through equity instead, and partnerships have their own rules for partner loans and partnership draws.

Two directions, two accounts

The name is the same either way, which is where most of the confusion starts. What matters is who owes whom.

Direction	Who owes whom	Account	Balance sheet section
Owner lends the company	The company owes the shareholder	Loan from Shareholder	Liability
Company lends the owner	The shareholder owes the company	Loan to Shareholder	Asset

You will also see these called Due to Shareholder and Due from Shareholder, or Officer Loans. The labels do not matter. Keeping the two directions in separate accounts does, because netting them together hides what each side actually owes.

Money in: a loan from a shareholder

On March 1 the owner transfers $25,000 into the company’s operating account. The company agrees in writing to repay it at $1,000 a month plus interest.

Date	Account	Account type	Debit	Credit
Mar 1	Operating Checking	Bank	25,000.00
Mar 1	Loan from Shareholder	Liability		25,000.00

Nothing touches the profit and loss. The company has more cash and an equal debt.

On April 1 the company makes the first payment: $1,000 of principal and $104.17 of interest, which is one month at a 5% annual rate on $25,000.

Date	Account	Account type	Debit	Credit
Apr 1	Loan from Shareholder	Liability	1,000.00
Apr 1	Interest Expense	Expense	104.17
Apr 1	Operating Checking	Bank		1,104.17

Only the interest is an expense. The principal reduces the debt, so after this payment the liability stands at $24,000. The interest is income to the shareholder on their personal return (IRC §61(a)(4)), which is one reason owners often lend at zero interest. Whether a zero-interest loan holds up is a question for the tax preparer, covered below.

The same account takes company bills the owner pays personally. If the owner puts a $1,800 software renewal on a personal card, the entry is a debit to Software Subscriptions and a credit to Loan from Shareholder. The expense is real; the company now owes the owner for it.

Money out: a loan to a shareholder

On June 15 the company wires $10,000 to the owner, who has signed a note to repay it within a year at 5%.

Date	Account	Account type	Debit	Credit
Jun 15	Loan to Shareholder	Asset	10,000.00
Jun 15	Operating Checking	Bank		10,000.00

On December 15 the owner repays $2,500 of principal plus $250 of interest, six months at 5% on $10,000:

Date	Account	Account type	Debit	Credit
Dec 15	Operating Checking	Bank	2,750.00
Dec 15	Loan to Shareholder	Asset		2,500.00
Dec 15	Interest Income	Other Income		250.00

The $250 is income to the company. The remaining $7,500 stays on the balance sheet as money the owner still owes.

What makes it a loan and not a distribution

A loan is a loan because both sides act like it is one. A tax preparer looking at a shareholder balance will generally want to see:

• A written note signed by the shareholder and the company, with an amount, a repayment schedule and a maturity date.
• Interest at a stated rate. The IRS publishes the applicable federal rates every month. Under IRC §7872, a corporation-shareholder loan charging less is treated as if the missing interest had been paid, which creates income on one side and a deduction or distribution on the other. Loans totaling $10,000 or less between the two are exempt unless avoiding tax is one of the principal purposes (§7872(c)(3)).
• Payments that actually happen on the schedule, visible in the bank statements.
• A board resolution or minutes approving the loan, for a corporation with more than one owner especially.

If those are missing, the preparer may treat money the company paid out as a distribution, a dividend or wages, and money the owner put in as a capital contribution. Each has a different tax result. In an S corporation, money the shareholder lends directly to the company adds to their debt basis, which can let them deduct losses beyond their stock basis (IRC §1366(d)(1)); a balance reclassified as a contribution counts toward stock basis instead. That decision belongs to the preparer, not the bookkeeper. The bookkeeper’s job is to make sure the balance is recorded in one place, ties to the documents, and is easy to reclassify if the preparer decides it should be.

How to set up shareholder loan accounts in QuickBooks Online

QuickBooks Online has no shareholder loan form. You create the accounts once and record everything through them.

Loan from Shareholder

1. Open the Chart of accounts and select New.
2. For Account type, choose Other Current Liabilities if the loan will be repaid within 12 months, or Long Term Liabilities if it will take longer.
3. For Detail type, choose Loan Payable under Other Current Liabilities, or Shareholder Notes Payable under Long Term Liabilities. If your file lists them differently, any loan detail type under the right account type works the same way.
4. Name it Loan from Shareholder, adding the owner’s name if there is more than one, and save.

Loan to Shareholder

1. Create a new account with Account type set to Other Current Assets.
2. For Detail type, choose Loans To Stockholders. Some files label it Loans to Shareholders; it is the same detail type.
3. Name it Loan to Shareholder, one per owner where there are several, and save.

Recording the activity

• Owner deposits money: when the deposit comes through the bank feed, categorize it to Loan from Shareholder. To enter it by hand, use + New > Bank deposit with the owner in Received from and Loan from Shareholder as the account. Do not let QuickBooks match it to an invoice or post it to sales.
• Owner pays a company bill personally: use + New > Journal entry. Debit the expense account, credit Loan from Shareholder, and put the vendor and receipt in the memo.
• Company pays the owner, or pays a personal bill: categorize the bank feed withdrawal to Loan to Shareholder, not to an expense.
• Repayments with interest: use a check, an expense, or a deposit with two lines, one to the loan account for principal and one to interest.

Each month, the balance in each account should match the loan schedule attached to the note. If it does not, something was categorized somewhere else.

The balance nobody is repaying

A pattern we see often at year-end is a Loan to Shareholder account that only goes up. The owner takes $3,000 here and $5,000 there, every withdrawal goes to the loan account because nobody wanted to call it a distribution, and three years later the balance is $140,000 with no note and no payments.

At that point the account is no longer describing a loan. Before the books go to the preparer:

1. Confirm the balance with the owner, transaction by transaction if needed.
2. Ask whether a note exists, and whether any repayment has ever been made.
3. Flag the balance in the year-end package so the preparer can decide whether it stays a loan or is reclassified.

The year-end checklist puts this under loans and equity, alongside the other balances a preparer will ask about.

Three shareholder loan mistakes in inherited files

1. Owner deposits booked as income. The bank feed sees a deposit and QuickBooks suggests sales. Revenue is overstated by every dollar the owner put in, and so is the taxable profit. Moving those deposits to Loan from Shareholder, or to a capital contribution if that is what they were, lowers the year’s profit by the same amount.
2. Personal spending booked as company expense. Groceries, school fees and personal travel on the company card land in Meals or Travel. They belong in Loan to Shareholder or in distributions, never on the profit and loss.
3. Owner money plugged into Opening Balance Equity. Whoever set up the file entered the owner’s starting cash against Opening Balance Equity and never cleared it. Part of that balance is usually an undocumented shareholder loan.

When the owner’s money is spread across sales, expenses and equity, sorting it out means going back through the bank statements and agreeing each transaction with the owner. That is cleanup work, priced on the months the file needs:

$99per month of backlog20% off 6+ months

When to hand this off: if owner money sits in more than one of sales, expenses and Opening Balance Equity, and more than one closed year is affected, recategorizing it means reopening filed periods. A free file review traces where the owner’s deposits and withdrawals went before anything is moved.

For money leaving a corporation as profit rather than as a loan, see the journal entry for dividends. The other everyday entries, from owner contributions to loan payments, are in the journal entry examples.