For an S corporation, understanding how to fund operations is critical. Shareholders often face a choice: provide funds as a loan or as a capital contribution. While both inject capital into the business, they have vastly different tax and legal implications. Properly structuring these transactions is vital to maintaining the S corporation’s tax status and avoiding IRS scrutiny. This guide will break down the core differences between an S Corp loan from a shareholder and a capital contribution, helping you make informed decisions for your business. Choosing the right method impacts everything from deductible interest expenses to the shareholder's basis in the S Corp. Mischaracterizing a loan as equity, or vice versa, can lead to unexpected tax liabilities, penalties, and even the potential loss of S corporation status. Lovie specializes in helping entrepreneurs navigate these complex decisions during business formation and beyond, ensuring your financial structures are sound and compliant across all 50 states.
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