Can Partnerships Have Shareholder Loans?

General partnerships are the default business structure when more than one person starts a business and does not formally file documents with the secretary of state. To finance the creation and expansion of that business, the owners must barter, partner, inject capital or use debt financing. When a partner lends money to the partnership, that loan is called a partner loan, not a shareholder loan.

A partner can make a loan to the partnership to provide financial capital that the company can use to pay vendors and employees or acquire equipment. Because the entity is a partnership, the loan is called a partner loan. Partners do not own shares or stock certificates in a partnership. Instead, partners own partnership interests or a percentage stake. Owners of a corporation own shares in that corporation. Only loans made by shareholders can be called shareholder loans.

Whenever two or more people start a business and each contributes money, time, services or effort to it, they create a partnership. A partnership may operate formally, with a partnership agreement signed by all partners, or informally, with only oral agreements. Partners have singular liability in addition to joint and several liability. In simpler terms, a partner is not only liable for the consequences of his own actions but also liable for the actions of the other partners and of the company.

Corporations are legal business structures wholly separate from their owners. A corporation's shareholders have no liabilities for the actions of the other shareholders, nor do they typically have liability for their own actions on behalf of the company. A shareholder's liability is limited to the amount of his investment in the company. A shareholder's loan must be an arm's length transaction at market rates or the corporation could be taxed on the excess benefit.

Partners may opt to lend the partnership money instead of taking on more equity for various reasons. For example, the partners may have agreed on a percentage ownership stake that the addition of equity by one partner would change. Or one partner may have the available funds and want to reap a higher return than a bank certificate of deposit provides. To avoid any problems with conflict of interest or taxes, the partnership must draft loan documents specifying terms that fall within market rates.

A partner loan's treatment depends on the wording in the loan document or partnership agreement. A partner loan can be treated as a personal loss to the providing partner and fully deducted on his personal tax return in the event the partnership dissolves and cannot repay the loan. Alternatively, all of the partners could be responsible for repaying their proportionate share of the loan if the partnership fails.