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Which Business Structures Need Shareholder Agreements?

Any business that offers more than one person partial ownership in the company must draft a shareholders’ agreement. Shareholders agreements should be as comprehensive as possible; otherwise a business owner may receive unfair treatment if a situation occurs that the agreement doesn’t cover.

Partnerships

Any type of partnership requires a shareholder agreement. The shareholder agreement explains the terms under which the partners own the business and provides details about each partner’s responsibilities.

A comprehensive partnership agreement covers not only how the partners manage the business but what rights each partner has in varying situations. Exit strategy is an important component of partnership shareholder agreements because partners may choose not to remain in business with one another for a variety of reasons. If one partner becomes too ill to continue working, the partners don’t get along or the business fails to make money, the partnership agreement governs how the partners may handle the situation. For example, the partnership agreement may forbid one partner to buy out the other partner’s share in the business.

In addition to setting rules for buyouts, the partnership agreement should cover what each partner is allowed to do with proprietary information both during his or her time in the business and after leaving the business. According to Profit Guide.com, it’s especially important to place non-competition and non-disclosure clauses into shareholder agreements because otherwise a partner could start a competing business after being bought out.

Corporations

Shareholder agreements for corporations are slightly different than those for partnerships. While partnership agreements clarify the terms under which two or more people jointly own a business, shareholder agreements for corporations cover the rights that shareholders in the company--investors who buy stock in the company--have as partial owners of the company, in addition to the rights that people who serve on the corporation’s board of directors have.

Commonly, corporation shareholder agreements give more decision making power to the board of directors than to other shareholders. The agreement lists situations in which shareholders have the right to make company decisions and clarifies the extent of their decision-making power. In most cases, shareholders have the right to vote on decisions such as changes to the company’s articles of incorporation; all other matters are up to the board of directors. However, shareholders have the right to remove people from the board of directors and appoint other directors in their place under most standard shareholder agreements. If no shareholder agreement is in place, the corporation is presumed to operate in this manner. Thus, a shareholder agreement isn’t strictly necessary, although it is a good idea to have one to reduce confusion and lower the risk of a shareholder taking inappropriate power.

However, many corporations would prefer to treat shareholders as quasi-partners. In these corporations, shareholders have a lot more decision-making power than in traditionally operated corporations. These corporations treat shareholders similarly to how partners treat one another in a partnership. Shareholders have equal rights and equal access to pay. In order to set this structure up, corporations have to have a shareholders agreement explaining precisely what rights shareholders have.

In some cases, corporations will also have to draft a shareholders agreement to give rights to a minority shareholder in the company. This often happens if an investor provides start-up or growth funding to the corporation in exchange for decision-making power. The corporation must draft a shareholders agreement to explain the special rights that the minority shareholder has that other shareholders do not have. The agreement should spell out the extent of the minority shareholder’s decision-making power.

Joint Ventures

Sometimes two businesses decide to pool resources or work together on specific projects. This kind of semi-merger is called a joint venture; every joint venture requires a shareholders agreement to clarify each partner company’s rights in the joint venture.

Most of the time, joint venture agreements give each partner company the right to half of the profits from the joint venture and the right to appoint half of the members of the joint venture’s board of directors. The shareholders agreement usually stops either partner from making business decisions without the other’s consent.

Conclusion

As the above examples demonstrate, any company that is owned by more than one person needs a shareholder agreement. The shareholder agreement is a legal document that protects all company owners in case the company dissolves or major decisions need to be made. Although some people may not be comfortable with shareholder agreements because they trust the people they own a business with, it’s a necessary part of doing business so that they can avoid confusion, misunderstandings and unfair treatment if something unexpected happens.

References

The Law Donut: Shareholder Agreements

http://www.lawdonut.co.uk/law/ownership-and-management/shares-and-shareholders/shareholder-agreements

The Profit Guide: Why You Need a Better Shareholders Agreement

http://www.profitguide.com/article/6571--why-you-need-a-better-shareholders-agreement

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