The only time your business should not have a shareholders agreement is when there is only one shareholder. Granted, there is no law that requires a company to have a shareholders’ agreement in place, but it is a really good idea. Shareholders’ agreements help the company run properly, keep the shares in friendly hands, and clarifies each shareholder’s rights and responsibilities. Unfortunately, most companies are formed quickly and on the cheap, which means they usually lack key documents like bylaws and shareholders’ agreements. So, if you are in that boat, do yourself a favor and get a shareholders’ agreement in place ASAP before a problem arises. Read on to learn about the key benefits of having a shareholders’ agreement for your business.
- Shareholders’ agreements protect the rights of the shareholders, such as getting access to the company’s books and records on a timely basis, being notified of important activities, and having the right to vote on big company decisions.
- Nobody wants to be in business with another person by accident. That is why a good shareholders’ agreement should prevent shares from being sold or transferred to a new shareholder without the existing shareholders’ permission. This often comes up in cases of death and divorce, but could also arise if a shareholder just wants to sell off their shares for some extra cash.
- If the shareholders have a dispute among themselves or with the company, there should be a quick, relatively easy process to resolve that dispute short of an expensive, public and time-consuming lawsuit. A good shareholders’ agreement can create such a process, starting with an in-person meeting, followed by a mediation, and then possibly an arbitration or buyout process. This is far better than letting a judge decide everyone’s fate.
- If a shareholder wants to exit a privately held company, it is often impossible to find a buyer for their shares, because no public trading market for those shares exists. A shareholders’ agreement can provide a process for allowing a shareholder to sell their shares to the company or other shareholders, including how those shares are valued and the payment terms.
- A shareholders’ agreement can also give some certainty as to how and when the company will determine and pay distributions of profits to the shareholders. This is particularly important in “pass through” entities like S-corporations, partnerships and certain LLCs, where shareholders are responsible for paying taxes on their share of the company’s profits, regardless of whether the shareholders ever received any cash from the company.
Although drafting a shareholders’ agreement at the outset of your business venture may seem time consuming, in the long run the benefits of having such an agreement legally in place can save your company much time and money.
Photo Credit: reynermedia