Why Should My Business Have a Shareholder Agreement?
Your business with your partner is up and running and everything is going great! You are most likely focusing on marketing, hiring and, of course, growth. So, what comes next? I think it is fairly safe to say that a Shareholder Agreement did not come to mind in the course of your planning, but maybe it should have. Here are a few reasons why putting a Shareholder Agreement in place, earlier rather than later, is critical for those with business partners.
A Shareholder Agreement is Your Roadmap to Solving and/or Avoiding Disagreements
As much as we hate to think about it, conflict between owners can come into play. In fact one study estimates that a staggering 62% of startups fail due to shareholder conflict. One way to ensure that there is an equitable and transparent way of dealing with conflict is to have your attorney draft a specifically worded shareholder agreement.
Require Unanimous Approval on Key Items
If ownership percentages are uneven, situations can arise where the majority shareholder partner(s) can override votes of the minority shareholder partner(s). To avoid any abuse of power, a shareholder agreement can set everyone on equal footing by giving minority shareholders a voice on important issues. An experienced attorney can help you draft a Shareholder Agreement that lays out the terms for requiring unanimous approval for various items including entering into loans, election of directors and cash contributions, just to name a few.
Share Transfer Restrictions
It is very important for small businesses to balance growth. Starting small means that removing or adding a team member can have a huge impact on the entire company. Without a specific provision in a Shareholder Agreement, the law allows for a shareholder to transfer their shares freely to anyone they choose. This scenario has the potential be an unwelcome surprise for other shareholders but can be avoided by imposing restrictions for these types of transfers in a Shareholder Agreement.
The best thing about a Shareholder Agreement is that they can be tailored to your business and can include or exclude any terms you choose. This will most likely strike up some important conversations amongst you and your partner(s) and/or team members as you discuss the key topics.
When dealing with something as important as your business, which is also your livelihood, it is always best to be safe rather than sorry. Do yourself a favor and sit down with an experienced attorney to draft a Shareholder Agreement early on in your business planning or startup to avoid potential, future surprises and problems.
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Sarah E. Holmes is a Philadelphia business attorney and strategist that helps start ups and established businesses looking to expand, protect their assets and increase their profits in an approachable, down-to-earth way. When you're looking for a business lawyer near you, we offer several convenient locations.