Corporations And Shareholder Agreements
Selecting the right type of company or corporation for your business model will help to advance your chances of financial and operational success while minimizing liability, expenses and tax obligations. If you choose to have your business incorporate and it qualifies under the IRS stipulations, it becomes its own legal business structure. A corporation is an independent legal entity; therefore, the corporation is set apart from the individuals who founded the business. Corporations operate as a separate entity, and they pay their own taxes, can own property, enter contracts, and can sue and be sued independently of those who own the company. Overall, the corporation itself is held legally liable for the actions and debts the business occurs and not the shareholders who own the corporation. When forming a corporation, it is then essential to create a comprehensive Shareholder Agreements where specific rights and obligations are precisely laid out.
The contents in a Shareholder Agreement depends on the corporation and the shareholders, but overall, it is a contract between the shareholders of a corporation. For example, a Shareholders’ Agreement is an arrangement amongst the shareholders describing how the company should be operated and the shareholders’ rights and privileges. To help you, your partners and your shareholders, Gudeman can help you Incorporate and develop all-inclusive Shareholder Agreements.
About Shareholder Agreements
In a corporation, things don’t always run smoothly. Sometimes there are disputes, sometimes there are conflicts of interest, and sometimes there are disagreements between parties. It is only natural that people don’t always see eye to eye.
And because of how common these disputes are, it is important to make sure that it does not sink the corporation. A simple agreement can help keep the entity afloat, even when tensions are rising like the tides.
This is where the corporate shareholder agreement comes in. Today we’re going to discuss what it is, what it’s for, and how it is used.
What Is A Corporate Shareholder Agreement?
A shareholders agreement is a legally binding document between some or all of the shareholders of a company. It is used to regulate matters of internal management, including conflict resolution and decision making. This contract defines the scope of the relationship between the contracting parties.
This agreement guides future decisions, in case shareholders have a conflict of interest.
Corporate shareholders’ agreement covers a wide range of matters, with provisions that can be tailored to suit the needs of the individual company.
Shareholder consent matters are usually included in the provisions. Another common provision is the restriction on the transfer of shares to outsiders and third parties. This is usually included by family-owned corporations who want to keep the company family-owned by carefully selecting shareholders.
Corporate shareholder agreements may also dictate the automatic transfer of shares when a certain event triggers a buyout — for example, the death or bankruptcy of a shareholder. Although typically, this specific provision is detailed under a buy and sell agreement, some corporate shareholder agreements also cover this.
Unless the provisions dictate otherwise, shareholders are free to transfer their shares to whomever they wish. This agreement may also give shareholders the first right of refusal on any share transfer.
Corporate shareholder agreements ensure that there’s a degree of control over how the business is run. It may even contain a list of matters or events that are not allowed to happen without the prior written consent of an agreed number of shareholders. This keeps all decisions under control, in the interest of protecting the company, as well as all of its shareholders.
How Is The Corporate Shareholder Agreement Used?
While this agreement is usually used for guidance, in order to facilitate correct decision-making that’s fair to all parties concerned, using it by enforcing its provisions is also as important.
As a legally binding document, members cannot simply ignore the provisions they agreed upon—not without risk of getting sued by another party.
Additional clauses may be added to the corporate shareholder agreement, depending on the circumstances. If a new shareholder joins the company, they are not automatically bound by this agreement, so keep that in mind. They have to formally agree to adhere to the provisions of this agreement in writing, to ensure that the provisions also apply to them.
Matters that are not covered in the shareholder agreement will be governed by the state’s corporate law.
It is important to have a lawyer look over the corporate shareholder agreement to make sure it is fair for all parties involved. Work with Gudeman & Associates, P.C., today!
Do We Need A Shareholder Agreement?
There is no legal requirement for companies to have a corporate shareholders agreement. But there are a number of compelling reasons why you should consider getting one anyway. Every company is advised to have it because it secures the company’s future, and also keeps it in the right direction.
Shareholder agreements are there to ensure that the company is being run properly and that the responsibilities of the shareholders are defined. It is better to operate with a clear direction in mind. And in a corporation, where multiple people are running it and making decisions, disputes and disagreements are inevitable.
With the help of a corporate shareholder agreement, actions and decisions cannot be executed unless it is in the company’s best interest. To this end, the legally binding document dictates what can or cannot be done, and which decisions require a consensus or discussion.
If there is a conflict between shareholders, the agreement will be used as the guide. The end goal is to run the company as smoothly as possible, to make it as profitable as it could be.
Here are some of the benefits of having a corporate shareholder agreement.
Minimizing And Settling Disputes
A shareholders’ agreement is a simple and easy way to minimize or even prevent potential business disputes from happening in the first place. The agreement makes it clear to each shareholder how decisions are made.
If there are disputes, the agreement will also provide procedures for their resolution.
There are situations that could affect one shareholder, which does not necessarily affect the others. Personal circumstances such as death, retirement, divorce, or disability can end a person’s connection to the company. A corporate shareholder agreement can safeguard the remaining shareholder’s financial interest in the company.
The agreement will help decide what happens to the departing member’s shares: who is allowed to buy them, and to whom they are offered first. Usually, this is discussed in a buy and sell agreement, but a corporate shareholder agreement may also cover it.
Changing The Company’s Legal Position
Without a shareholder agreement, a company is subject to control in accordance with the comprehensive body of company law. This would normally govern how a company would be run, settling disputes, etc. But with your own corporate shareholder agreement, the company may follow whatever arrangement was agreed upon between the shareholders. This changes the way the company works and makes it so that the shareholder’s specific needs are prioritized.
With such an agreement in place, a corporation could easily make a case for its own stability. The existence of the shareholders agreement can help in raising finance from banks or creditors. It demonstrates that the company has a solid goal in mind, and is capable of following through. It makes it that much more attractive to potential partners.
Having a corporate shareholder’s agreement is something newer business owners don’t have in mind. It’s not something they prioritize, not realizing how important it is in securing the company’s future.
Work with Gudeman & Associates, P.C. today and create a corporate shareholder agreement that suits your company and protects all shareholders and parties involved.
Contact Us For Experienced Guidance
To learn more about how our experience can help you and your business, please contact us to arrange a consultation at our Royal Oaks office, over the phone or via video conference. Please call 248-630-3671 or send us an email and a member of our team will reach out to you promptly.