A shareholder agreement is a legal document that creates the regulations by which a corporation is run. When starting a business that involves more than one person who is investing money in the company, a shareholder agreement is an essential foundation on which to build a corporation. A shareholder agreement should be detailed. It should describe how the business will be run, how problems between shareholders will be handled, and clarify the responsibilities and benefits of each shareholder.
A shareholder agreement outlines the details of a corporation so that there is no confusion as to the rights of each shareholder from the beginning. While the articles of incorporation will identify the key players in the corporation, the shareholder agreement will clearly outline everyone's roles and responsibilities.
As the corporation grows, there may be the need to make decisions regarding acquiring new space, purchasing property, or how to pay back a loan borrowed on behalf of the business. The shareholder agreement provides the protection you need against decisions being made by only a few members of the corporation. While it may seem tedious to outline every possible situation the corporation may find itself in, the clearer the shareholder agreement is, the easier it will be to make decisions.
Once the business is in existence for a number of years, there will probably be a need for stocks to be transferred or sold to another shareholder. In order to protect your share of the company, you can be as detailed as you want to be when it comes to selling or transferring stock. Within the shareholder agreement, you can make provisions that can restrict certain transfers or sales, or you can look at it from the perspective of what types of sales or transfers would be allowed. The reasons behind such regulations include the following:
Restricting who can inherit or purchase shares in a corporation protects each shareholder. You do not want the original shareholders to find that an outside entity has come in and purchased shares, only to wreak havoc with the existing shareholders. For example, if the business is a corporation that is a family business, restrictions on who can purchase or inherit shares become very important. When you want to make sure that the business stays in the family, you have to provide ways for this to happen in a shareholder agreement.
A successful shareholder agreement will discuss the legal obligations that each party entering into the contract must follow. Basically, the agreement is how the business will be structured, and it is the foundation on which the business will grow. You have to make it clear in writing what the legal obligations are of every person who signs the initial agreement. While it is not possible to completely rid the corporation of future disputes, a well-written shareholder agreement can be used to settle shareholder disputes in a civil manner.
How dividends are divided among shareholders is very important to shareholders, and this is an important part of any shareholder agreement. You can pay dividends quarterly, every six months, or once a year. Dividends are business profits, and how your dividends are calculated will be determined in the shareholder agreement. Investors will want to know how they are going to earn money from their investment and what your plan is to distribute the money.
As you set up the business, a successful shareholder agreement will also determine what will happen in the event that the business wants to dissolve. An exit strategy should be designed as an essential part of any shareholder agreement, and this can be done in several steps.
The shareholder agreement is a contract between all the parties who sign it, giving rights and responsibilities to those who become stakeholders in the business. It is a foundation on which to build a solid business, and it will protect the interests of everyone involved if it is written correctly. When an agreement is written poorly, this can lead to disputes that are difficult to settle among shareholders and can cause individuals to potentially lose their fair share of the business.