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Shareholder injections/redemptions

A shareholder injection occurs any time a company’s existing shareholders put cash into the business. In return for this cash they receive either additional shares or, if the injection takes the form of a shareholder loan, a promissory note.

A shareholder redemption occurs when the company takes cash out of its accounts to buy back shares or repay a shareholder loan.

When shareholders receive additional shares for their injection, the company’s total shareholder equity account increases and the debt-to-equity ratio improves because the company has increased its amount of equity while its debts remain the same.

When shareholders provide a shareholder loan and receive a promissory note, the company’s total liabilities increase and its debt-to-equity ratio worsens. This can be avoided if the shareholder signs a subrogation agreement that that technically reclassifies the debt as patient capital. When this is done, the injection is looked upon as equity.

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