Shareholder Loan Subordination Agreement

From a bond perspective, most guarantors, as long as shareholder loans are subordinated to bond claims, will treat the proceeds of capacity valuation as a capital equivalent. In addition, capital payments are generally not taxable unless, in the case of some pass-through companies, the loan base has been reduced by business losses or other adjustments. A subordination agreement recognizes that one party`s claim or interest is greater than that of another party if the borrower`s assets must be liquidated to repay the debt. Subordinated debt is riskier than priority loans, so lenders typically charge higher interest rates to offset the risk. A guarantor will only consider a partner`s loan as a capital equivalent if the loan is proved by a debt bond and the contractor signs a subordinated contract. The loan must be carefully structured and documented, with a market-compliant interest rate and economically reasonable terms, to ensure that it is treated as a legitimate loan and not as a contribution to equity. A subordination agreement provides that the loan is subject to all rights and rights of the guarantor against the company in relation to the guarantee. In addition, it provides that the guarantee will be paid in full before payments are made to the shareholder. In the event of bankruptcy or bankruptcy of the construction company, the contract confers on the guarantor all the rights that the shareholder may have vis-à-vis the company with regard to the loan. However, subordination agreements are difficult to formulate and can be difficult to withdraw as soon as the owner wants the money back. A strategy that can satisfy your guarantee: make a shareholder loan. While such a measure carries its risks, it can usefully improve your capital without pushing you into the complexity of debt financing. A subordination agreement is a legal document that establishes that one debt is ranked behind another in priority for the recovery of a debtor`s repayment.

Debt priority can become extremely important when a debtor is in arrears with payments or goes bankrupt. For example, if your construction company is organized as a C-Corporation, any paid-up capital would be taxed at the shareholder level – if it was paid out later as a dividend. For other types of businesses, double taxation is not an issue, but distributions usually reduce an owner`s base, which can have negative tax effects. Finally, you may want to make a formal submission of the Uniform Commercial Code with respect to the loan. This can help define the loan as a secured debt versus unsecured debt in insolvency. If you`ve opened multiple projects, you may want to close a few before executing the loan. Also check your employment fees to make sure they are as defensible as possible. Also update, if necessary, your organizational depth diagram to demonstrate your ability to stay in business and repay the loan if a major executive leaves unexpectedly.

Of course, simply taking a shareholder loan cannot, in itself, push your ability to engage excessively. Be sure to take all the usual steps to remind your safety that your construction business is a successful business. The signed agreement must be confirmed by a notary and registered in the official county registers in order to be enforceable. Let`s be clear, shareholder loans are hardly risk-free and can be complex to set up and implement. But with the advice of your financial advisor, you are an idea worth considering and perhaps even executing. Call a member of our construction team at 404-874-6244 to decide if this is the right path for you. Priority debt holders are paid in full and the remaining $230,000 is distributed to subordinated creditors, usually for 50 cents on the dollar. . . .