While many new entrepreneurs will go for a sole proprietorship or a partnership, there are others who opt to start a corporation—a separate legal entity that’s made to run a business. It may be more complicated than simply owning 100 percent of your business and being completely liable, but it does provide some unique advantages.
To run it smoothly, you’re going to understand a few more things. For example, what is a corporate shareholder agreement? That’s what we’re going to discuss here today.
What is a Corporate Shareholder Agreement?
A corporate shareholder agreement is a contract between the shareholders of a certain company. It specifies how the corporation will be run, and what happens to it when certain events occur. Different events could trigger this agreement, and so it is used to manage close corporations in states that have special laws that recognize them.
These agreements are necessary to help shareholders make important decisions in crucial moments where there may be a disagreement between each of them.
In a way, it is similar to a buy-sell agreement, which secures the future of a business in case one of the owners leave.
This small number of shareholders who are actively participating in the corporation’s daily business operations will eventually have their own ideas of what direction they want to take the company. A corporate shareholder agreement may be used for a number of things, but the main principle is to settle disputes in a way that suits the corporation’s best interest.
The agreement itself can cover a wide variety of matters. It may modify provisions of a state’s corporate law to better suit the needs of its shareholders.
Most of the time, it is used to restrict the transfer of stock. For example, this agreement can determine when a shareholder is allowed to sell his stock to a third-party. In this case, it is important to settle this because some shareholders may want to keep the corporation a family-owned business.
The corporate shareholder agreement will include provisions regarding stock ownership. This may require the shareholder to first offer the stock to the remaining shareholders. This is called the right of first offer. Similar to a buy and sell agreement, it may include provisions on how to govern stock transfers if a shareholder dies, retires, files for divorce, files for bankruptcy, or leaves the corporation for any other reason.
Another thing that can be settled with a corporate shareholder agreement is the shareholder’s right to become a director or hold any corporate office. This is for shareholders who want to be involved in running the corporation. State laws allow shareholders to vote for who will run the corporation—but they are usually unable to hold any corporate office themselves. The corporate shareholder agreement can provide that the shareholder will be employed by the corporation. It will specify his job duties, etc.
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. Once you and your business partners have a successful business you will eventually have to consider a succession plan. Work Detroit’s Trusted Team of Business Planning Attorneys. Contact Gudeman and Associates Attorneys today!
Gudeman & Associates, P.C.
Gudeman & Associates, P.C. Serving South East Michigan. Attorneys You Can Trust
*Disclaimer- none of this content is considered legal advice. Please call our attorneys to speak to one about your legal questions.