Whether you are planning to create a new corporation, or have already created one – it is essential that you have a Shareholder’s Agreement with your partners in the business. Shareholder’s Agreements are essential to protect the interests, time, and peace of mind of every partner in the business. Many disputes and arguments between business partners can avoid going to litigation if a Shareholder’s Agreement is in place to govern the relationship between them. As your corporation gets larger and generates more income, the need for a Shareholder’s Agreement to protect yourself and your business becomes more paramount.
Here are Five Key Reasons why your business needs a Shareholder Agreement
They Govern the Relationship Between You and Your Business Partners
As your company becomes more successful, there’s more at stake. While handshakes and informal agreements may have sufficed at your company’s early days, it’s absolutely essential that everything you create with your business including its assets and income is governed by a finely tuned Shareholder’s Agreement, customized to your business’ special circumstances. Shareholders Agreements protect you and your company by solidifying the terms around things like under what circumstances someone can transfer shares, and what happens to the company in case one of the partners becomes incapacitated. Figuring out these things now is sure to save time and headache by preventing disputes and litigation.
They Create Rules and Restrictions on Transferring Shares
Shareholder Agreements protect the future of your business by limiting how and to whom shares can be sold or transferred. Life events like disability, a death in a family, or divorce can complicate your business – even if they didn’t happen to you. By putting restrictions on the transfer of shares you can ensure that your partner’s shares are offered to you first under a Right of First Refusal before they are sold to an unknown third-party. This protects your business’ future, and also provides you with a guaranteed opportunity to own more of your business if your partners decide to back out.
They Help Protect Minority Shareholders and Investors
If you’re investing in a new business and are about to assume a minority stake in the Corporation, it’s very important to protect yourself by insisting upon a Shareholders Agreement. They can ensure that your rights as a Minority Shareholder or Investor are protected by allowing you to veto certain changes to the business and require your approval for major decisions. Without such provisions guaranteed in writing, you are at a greater risk of being sidelined from major decision-making, and having your investment capital spent in a manner you disagree with.
Non-Competition Clauses
Most Shareholder Agreements will have Non-Competition Clauses which restrict the ability for partners in your corporation to take the knowledge that they’ve gained, and your clients, in order to set up shop and compete against you. A Shareholder Agreement acts as a contract between you and your partners to make sure that nobody ends up competing against the other, further protecting you and your corporation. Other similar clauses in a Shareholder’s Agreement can guarantee Confidentiality between the partners to make sure nobody spills any company secrets to third-parties.
Dividends and Compensation
At the beginning of a business, it’s more common for partners to informally agree on what they should be paid in terms of dividends and compensation. But as the business grows and generates more income, it’s essential that the terms governing dividends and compensation are set in stone to avoid future conflict. Shareholder agreements can set the number of dividends that Shareholders receive and can set the formula to calculate those dividends. You can also set rules for compensation regarding travel and out-of-pocket expenses.
As your business continues to grow it’s important for you to set down all these rules, and others, in an official Shareholders Agreement to protect you and the future of your business. Omnia Law can help by drafting your company a Shareholder Agreement that meets the specific needs of your business, your industry, and the nature of your relationship with your partners. Contact the firm for a free consultation.