Too often, people treat the corporation as their own piggy bank, and in the reverse, treat the shareholder(s) as their corporation's piggy bank. If people would apply the caveat that you and the corporation are separate entities, it helps people stop resuscitating a dying business with cash infusions, for one thing. If you learn to manage the financials well, you will also better manage the entity's success or failure.

I've done enough business reviews for potential buy/sells to know how often these conditions are fudged, to "make the financials look better" or not to reveal something to the banker. And why would you create a debt with interest payable, which means the corporation has a reportable expense and the shareholder has reportable interest income from their own entity that had the expense? Nothing like running the dollars around in circles until there is nothing left.

In my experience, the concept of indebtness needs to be fully respected and properly implemented when it is determined this needs to happen, which includes interest, a signed note payable, with the understanding that this is a true liability, and there will be payments made on schedule for debt service.

A good reason to use Debt exists when there is more than one shareholder and there is the need for one person to sustain the business that exceeds the ability of all parties to contribute. In this example, ask yourself this question: Could we borrow from any lender that would make the deal? If so, is there a better reason to make it an in-house lender? Is it favorable to both the business entity and that person?

If you would not borrow from an outside party, what makes it okay to call this Debt to that shareholder? You're leveraging their relationship just to get the funds, already; don't complicate it as Debt.