To avoid recharacterization as a dividend, an advance to a shareholder must represent a bona fide loan.A bona fide debtor-creditor relationship is generally suggested by

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All of the above factors contribute to creating a bona fide debtor-creditor relationship, which is necessary to avoid recharacterization of an advance as a dividend. The advance should be recorded in the corporation's books, evidenced by a note, and the shareholder should make payments on a fixed schedule with interest charges. Securing the note with collateral can further demonstrate the legitimacy of the loan.

To Avoid Recharacterization as a Dividend, an Advance to a Shareholder