How to recapitalise a limited liability company using a loan from a shareholder?

This article answers the following questions:

• How can a limited liability company be recapitalised through a loan?
• What documents must a company prepare when borrowing money from a shareholder?
• Can a shareholder granting a loan to a limited liability company contribute the funds in cash?

In the case of small and medium-sized businesses, it is often necessary for a limited liability company to urgently obtain additional capital to enable further business development, improve financial liquidity, or finance specific expenses. One solution that can assist in such a situation is providing funding to the company by means of a loan granted by a shareholder. What should one keep in mind when opting for this approach?

In this article, we will discuss what a shareholder loan is as a form of recapitalising a limited liability company, outline its advantages and principles, and explain the steps that must be taken to successfully carry out this type of transaction.

What is a shareholder loan and why is it used to recapitalise a limited liability company?

A shareholder loan is one of the simplest methods of recapitalising a limited liability company, as it does not require increasing the share capital.

It is a contract under which a shareholder of a limited liability company lends a specified amount of money to the company, which may be used for any purpose related to the company's operations (e.g., investments, settling current liabilities, development).

This type of financial support can be an attractive solution because it allows the company to quickly obtain funds without involving external investors or banks. It is also a less formal procedure, especially compared to the process of increasing share capital. Importantly, financing the company through a loan granted by a shareholder may offer greater flexibility in terms of repayment conditions, interest, and other key provisions.

The form of concluding a limited liability company recapitalisation agreement

In most cases, a shareholder loan agreement does not require a specific legal form. However, it is considered good practice to conclude it in written form in all cases – that is, signed by both the company and the shareholder granting the loan. In certain situations, a written form or even a notarial deed may be required – for example, when the sole shareholder is also the sole member of the management board of the limited liability company. Moreover, the agreement through which the shareholder transfers funds to the company should comply with civil law regulations and also take into account specific provisions that may arise from the Commercial Companies Code or the company’s articles of association.

It is worth noting that a private loan granted by shareholders to the company provides the parties with relatively high flexibility in determining the terms – certainly much greater than in loans granted by financial institutions. For this reason, a shareholder loan can often be offered on more favourable terms, particularly with respect to repayment schedules or collateral requirements.

What should a shareholder loan agreement include?

A secure and well-structured shareholder loan agreement should contain the following key elements:

• Loan amount – A clearly defined sum, including the currency of the loaned funds.
• Interest rate – Should be specified directly in the agreement and set on market terms to minimise the risk of tax authorities challenging the arrangement.
• Repayment terms – May involve lump-sum or installment payments; parties can also agree on options for early repayment.
• Purpose of the loan – It is also important to specify the purpose for which the limited liability company will use the loan granted by the shareholder (although in this case it should be emphasised that – if the provisions of the agreement are properly formulated, e.g. by granting the shareholder the right to demand immediate repayment in the event of the company spending the funds in a manner inconsistent with their intended purpose – this is not a requirement).
• Loan security – For larger amounts, the shareholder may require security, such as a mortgage, guarantee, or promissory note.
• Additional provisions – Depending on the company’s and shareholder’s situation, the agreement may include conditions like periodic reporting on the company’s status, contractual penalties for non-performance of non-monetary obligations, or interest for late payments.

Transfer of funds granted to a company via shareholder loan

Once the loan agreement has been concluded, the shareholder transfers the funds to the company’s account. Keep in mind that a shareholder loan may be transferred to the company either via bank transfer or in cash (in the latter case, relevant legal limits should be observed). It is important to maintain proper documentation of the transaction, such as a bank transfer confirmation or proof of cash receipt.

Additionally, it is worth ensuring that the loan is transferred to the company’s bank account and that repayments are made to the shareholder’s account. Any lack of clarity in this regard may lead to the payments or repayments being reclassified by Polish tax authorities as gifts or other types of gratuitous transfers, rather than a legitimate loan.

Corporate consents required for granting a loan by a shareholder

Corporate consents are a key element that may influence the process of a shareholder granting a loan to of a limited liability company. Although in practice such a loan is more flexible than issuing new shares or increasing the share capital, in the case of some entities, additional obligations related to obtaining appropriate corporate consents may arise during this process – both on the part of the company taking out the loan and the shareholder granting the loan (in the case when the shareholder is also a company).

These steps are vital to ensure compliance with legal regulations and the corporate governance rules applicable to the company, with obligations stemming both from the Commercial Companies Code and the company’s articles of association or detailed internal procedures established for this purpose.

For example, if the lender is a member of the management board, the loan agreement must be approved by the shareholders’ meeting – this measure serves to further protect the interests of the company and its shareholders. In addition, entering into a loan agreement exceeding twice the company’s share capital – unless the articles of association state otherwise – also requires shareholder consent.

As illustrated by these examples, granting a shareholder loan may require the assistance of advisors specialising in professional corporate services and, depending on the specific circumstances of both the borrower and the lender, the implementation of appropriate actions.

Documenting Corporate Consents

Depending on the company’s structure, the process of obtaining consent for a loan granted by a shareholder may, in particular, require the preparation of documents such as a resolution of the shareholders’ meeting or a management board resolution (together with the corresponding minutes). It is essential that this documentation is drafted in accordance with the corporate governance standards of the organisation and the requirements of the Commercial Companies Code. This will protect the company from potential legal issues in the future, especially in the context of tax inspections or legal and financial audits.

Representation in the execution of a loan agreement

Each party to a loan agreement must be represented in accordance with the provisions of the Commercial Companies Code and the internal representation rules of the limited liability company. Particular attention should be paid to situations where a shareholder, acting as a natural person, grants a loan to a company that they also represent as a member of the management board. In such cases, it is necessary to appoint a special proxy to execute the agreement on behalf of the company, or alternatively, to have the company represented by the supervisory board – if one has been established.

Granting a loan to a limited liability company is not difficult, but sometimes requires expert assistance

A limited liability company is one of the most attractive forms of conducting business in Poland, and a shareholder loan is generally a particularly convenient and effective means of recapitalisation, as it enables the company to obtain the necessary funds in a swift and flexible manner. However, a properly prepared loan agreement and transaction transparency are key to avoiding complications in the future.

It is therefore important to observe the relevant formal requirements – familiarise oneself with the obligations of both the company and the shareholder, ensure the content of the agreement and representation of the parties are appropriate, and obtain and document the necessary corporate consents – so that the loan agreement remains valid and the transaction does not pose future difficulties. In many cases, the support of a professional advisor is invaluable.