As you know, building a successful business takes talent, innovation and perseverance. Another key factor is making sure all shareholders are on the same wavelength. A shareholders' agreement will help you put the odds in your favour. We'll walk you through the main features.
It's a legally-binding document drafted and signed by all shareholders. The length of the document depends on its degree of complexity, the structure of the business and your industry.
Like a will or a marriage contract, drafting a shareholders' agreement requires a high level of knowledge and expertise. It must be tailored to your specific situation. That's why, in most cases, it doesn't make sense to try to save a few dollars by drawing it up yourself. Ask for expert assistance from a legal professional who specializes in business.
An ounce of prevention is worth a pound of cure. A shareholders' agreement can help make sure your business is prepared for whatever the future may bring. By setting rules from the start, you can prevent or resolve issues and conflicts among shareholders. You'll also protect your business from unexpected events, such as the departure of a majority shareholder. A shareholder's agreement can:
For example, to protect minority shareholders, the agreement could include a piggyback clause. In the event of a buyout of a majority shareholder’s shares, this clause allows minority shareholders to sell their shares at the same time, meaning they are not forced to do business with an unwanted new co-owner.
You can decide what rules and topics you want the agreement to address. Here are a few of the most common clauses:
Shareholders can take out a life insurance policy that allows their shares to be automatically redeemed at death for a pre-established amount or according to a predetermined share valuation method. The other shareholders are named as beneficiaries on the life insurance policy. Otherwise, they may end up having to run the business with the heirs of the deceased shareholder. Pro tip: Review this clause every 5 years or whenever significant changes occur.
The earlier the better, for several reasons:
Absolutely! People who have gone into business with family members or friends will tell you that it can be even more difficult to resolve business issues when your personal relationships are close. This is normal. Business is a sensitive topic. A shareholders' agreement will help keep everyone happy.
Drafting this essential document is among the best practices you should adopt when you go into business with other shareholders. Running a business can be quite the challenge. To avoid preventable issues, ask a professional to help you draft a shareholders' agreement. We're here to answer your questions.
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