An individual (our client) purchased the stock of an S Corp from the lone shareholder of that corp for $450,000. Here's the twist, our client obtained the funds to purchase the stock by obtaining a SBA loan borrowed in the name of the S Corp he is purchasing. The proceeds of the loan were disbursed directly to the previous stockholder. Normally, an individual would obtain his/her own persoanl financing to purchase the stock. In essence, the S Corp has taken on the debt for this personal purchase of the stock. We had not seen this before. We recorded the loan on the balance sheet of the S Corp as a long term liability. Since the S Corp never received the cash from the loan, we put the offsetting debit to a "Due From Shareholder" asset account on the balance sheet. So, we have essentially recorded a loan to the shareholder that we believe the new shareholder is obligated to pay back to the S Corp.
Are we correct in how we have recorded this on the balance sheet? Is there a better way?
Is there a danger that the distributed loan proceeds could be classified / must be classified as a shareholder distribution?
As the S Corp is making monthly payments on the SBA loan, is there any merit to recording an additional monthly journal entry that debits (increases) "Shareholder Distributions" and credits (decreases) "Due From Shareholder" as a way to lower the outstanding due from shareholder balance? The S Corp is profitable and there is adequate stock basis to absorb the distrbutions.
Any advice would be appreciated. Thank You!
Are we correct in how we have recorded this on the balance sheet? Is there a better way?
Is there a danger that the distributed loan proceeds could be classified / must be classified as a shareholder distribution?
As the S Corp is making monthly payments on the SBA loan, is there any merit to recording an additional monthly journal entry that debits (increases) "Shareholder Distributions" and credits (decreases) "Due From Shareholder" as a way to lower the outstanding due from shareholder balance? The S Corp is profitable and there is adequate stock basis to absorb the distrbutions.
Any advice would be appreciated. Thank You!
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