What to Include in a Shareholder Agreement?

Having practiced business law for many years a common question for new, inquiring business owners is whether or not they need a Shareholder Agreement. The short answer is yes. A shareholders agreement is not a lawyer’s way to make money off the gullible. Instead, a shareholders agreement affords protections and mutual understandings of how a business will be operated, managed, capitalized, and sold. Having a shareholder agreement up front from the first day your business opens will allow all participating members to understand the way a newly formed business will operate and handle various issues that may arise during the course of its operation. As an additional caveat, it is of the utmost importance for you to higher an attorney to draft a shareholder agreement. This article includes some common areas of concern that will arise in your business over time and should be considered upfront.

It may be cheap or even free and fast to download a cookie-cutter template shareholder agreement, but remember whoever wrote it did not entertain the needs and concerns of your new business. If a problem arises down the road it is never a defense to say that you failed to read the contract agreement. An experienced attorney on the front end could save you thousands on the backend. One of the reasons so many new businesses fail is because they initially minimize the value of an experienced business attorney.

Ask yourself: what will happen to your business if someone dies, someone gets divorced, if there is a management gridlock, how will a partner withdraw from the business and if they do can they sell it to just anyone without your consent? Often times new business owners are so sure of their business model they fail to see potential problems that could arise in the future. A court will rarely pierce a well-constructed shareholders agreement. Judges and legal theory agree that businesses should be left to operate pursuant to the terms agreed upon by its members. Knowing where everyone stands in the event of unforeseen events or even in times of death or financial difficulties can aid in keeping the lines of communication open between shareholders.

Depending on how complex your proposed business model is you will also want to consider how your corporation will be taxed and funded. Corporations are usually treated as either an LLC, Chapter S corporation, or a Chapter C Corporation. Determining the benefits and consequences of both are an additional consideration. In regards to funding the business you will want to draw a distinction as to who manages the corporation and who is afforded a portion of the shares in the business. you may even need assistance in determining what your initial business concept is worth, how it should be evaluated annually, and what will be done with future shares of the company if sold. It may seem overwhelming, but the point is if you are serious about your business venture and you want to do everything you can to see it succeed than hiring an experienced business attorney should be your next step in the process.