Do You Need a Shareholder Agreement?
Shareholder agreements are one of those business decisions that can make or possibly break a family or multiple partner business. While business partners may have the company’s best interest in mind, eventually issues do arise that need to be handled professionally. For the good of the company, shareholder agreements are designed to set the rules on how certain financial and business issues are to be handled.
Possible Situations for Shareholder Agreements
• Family or partner business disputes
• Business expansion plans
• Selling shares at milestone events
• Owner’s death
• Estate freeze
• Transferring future capital growth
Shareholder Agreement Necessities
The five main areas that should be included in a shareholder agreement are:
1. Decision-Making and Governance – There should be specific information on how business decisions will be made as well as how any disputes will be managed.
2. Entrance – To allow for incoming shareholders, the agreement should state how individuals can purchase shares at a fair price.
3. Exit – The exit procedure should be similar to the entrance process with a set way of determining any of the shares’ value. Also, there should be details on what to do with the shares in the case of any shareholder’s death or disability.
4. Compensation – The agreement should outline who gets compensated for what role in the company and for how much.
5. Return on Investment – The return on investment should be clearly stated on how any dividends will be disbursed. Moreover, there should be a quantifiable way to measure the value of each investment.
Putting together a quality shareholder agreement requires everyone’s input and consensus. Moreover, working with a tax professional will guard your company from any tax issues related to shareholder agreements. Stay tuned for our next article as we take a closer look at the key tax issues involved with shareholder agreements.